What is decreasing term life insurance?

For example, the benefit during the first year of a 5-year decreasing policy may be $10,000, and decrease by $2,000 every year. At the end of the fifth year, the face value is zero and coverage expires. Premiums for a decreasing policy usually remain level throughout the term.

For-Insurance recommends decreasing term life insurance policies as a way to insurance financial obligations which reduce with time, such as mortgages or other amortized loans.

Click on link to the right for more about mortgage insurance and credit life insurance, two of the most common forms of decreasing term life insurance.

Answer

Decreasing cover is usually used to cover a mortgage. Basically:

If you have a �100,000 mortgage and take out LEVEL cover, you will pay your monthly premiums and if you die at ANY time during the term (whether 1 year or 23 years in), your beneficiaries will receive �100,000

If you have a �100,000 mortgage and you take out DECREASING cover, you will pay much lower premiums but if you die, your beneficiaries will only receive the money needed to cover the mortgage - so if you had �20,000 left to pay off, thats how much they would receive. They will actually only receive what is left on the policy depending on how it has been set up to 'decrease' at the outset of the policy - which could be greater than or less than the rate that the mortgage debt has reduced !!!

Obviously, the decreasing cover is sufficient and much cheaper but level cover will provide your beneficiaries with a lump sum should the worst happen!

Answer

Decreasing term life insurance applies when your premiums stay constant for the period of the term but your cash benefits decrease with each year. The logic behind opting for this type of insurance is that as your family gets older, the amount required to maintain itself might lessen and that the reduced death benefits will still prove adequate. However, it is more likely that due to inflation and a possible age gap between the beneficiary and the insured (not always the spouse), the standard of living will definitely be higher than when the policy was purchased. Decreasing insurance is more suited for items such as home mortgages rather than life insurance. Or you could opt for it in the form of a rider provision or even a separate policy.

First answer by Lozzabell. Last edit by DeniseMancini. Contributor trust: 1 [recommend contributor]. Question popularity: 256 [recommend question]