Are you looking for a life insurance policy to cover your short-term financial obligations that won’t break the bank?
If so, decreasing term life insurance may be the right option for you!
Please keep reading to learn more about how a decreasing term policy works and whether it’s right for you.
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What is Decreasing Term Life Insurance?
There are many types of life insurance, and it can be confusing to know which kind of term coverage is right for you.
A decreasing term life insurance policy is different from a level term policy.
With decreasing term policies, death benefits decrease over a defined period with lower constant premiums and term lengths between five to 30 years.
A decreasing term life insurance is often used to pay off business, mortgage, auto, and personal loan debts after you die.
These lower premiums might sound good, but be cautious because a decreasing term policy can leave you unprotected when you require coverage the most.
What happens at the end of a decreasing life insurance policy?
You will be covered for a fixed period when buying decreasing life insurance. The death benefit will be zero when you outlive your term insurance coverage.
According to Business Insider, you could be left without coverage when you pay off your loan and do not have other life insurance policies in place.
Level vs Decreasing Term Life Insurance
Level vs Decreasing Term Life InsuranceLevel-term life insurance offers guaranteed death benefits and affordable premiums for between 10 and 40-year term periods.
These level-term policies are fantastic for families, offering peace of mind for pennies a day, the premium rock solid and steady in a world of inflation.
There are some critical differences between level and decreasing life insurance policies.
Decreasing term insurance coverage reduces the death benefit according to a pre-defined schedule.
A decreasing insurance policy is often cheaper because the death benefit reduces yearly while the premium remains the same.
This feature is the direct opposite of another low-cost policy called annually renewable term, which provides a level death benefit with a premium that will increase yearly.
You can buy term life insurance with no medical exam or with a physical needed to secure coverage.
Some decreasing life policies do not require the insured to take a medical examination making it easier to secure a policy.
While standard level term policies often require more medical questions and an examination, including blood work.
Decreasing Term Insurance for Families
Decreasing Term Insurance for FamiliesMany families use a decreasing term rider to cover a specific debt, most notably college expenses and mortgage loans.
A reducing-term life insurance policy can be used to pay off any significant financial burdens left behind by your passing.
However, many families are still satisfied with standard term policies, especially families with dependents.
Very few people complain about ‘excessive’ family life insurance!
If Dad bought a 30-year term to protect the mortgage and passed away at year 29, with the mortgage one year away from being paid, no one will return the excess death benefit. They are going to thank Dad for his foresight.
Decreasing Term Life for Business
Decreasing Term Life for BusinessMany businesses must cover the owners with a life insurance policy as a condition to secure a short-term bank loan, with the death benefit going to the lender to pay off the loan.
The principal, the amount needed to repay the loan, decreases over time as payments are made.
Therefore, to match this reality and make sure your business is not paying for more insurance than it needs, insurance companies designed decreasing-term policies for these situations.
If you have an investor or executive essential to your company, you might consider decreasing key person coverage.
A keyman insurance policy provides start-up companies with funds in the form of a death benefit if an investor dies before short-term business goals are met.
Decreasing term insurance is occasionally used by partnerships to cover each other on financial issues like start-up costs, debt retirement, and more.
These partnerships have formal buy-sell agreements using life insurance to divide the business shares with the premature death of a partner.
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Case Study:
Decreasing Term Life Insurance
Needing a 7-year loan to expand her business, Carol was dismayed when the bank required her to purchase a business life insurance policy to cover the loan.
Worried about the expenses, her agent designed a plan that decreased her premium by lowering her coverage over time.
The following chart shows the expense of a hypothetical 10-year level-term vs. decreasing term policy for a $700,000, 7-year loan.
Decreasing Term Insurance Example
| Level | Premium | Decreasing | Premium | |
| Year 1 | $700k | $600 | $700k | $450 |
| Year 2 | $700k | $600 | $600k | $450 |
| Year 3 | $700k | $600 | $500k | $450 |
| Year 4 | $700k | $600 | $400k | $450 |
| Year 5 | $700k | $600 | $300k | $450 |
| Year 6 | $700k | $600 | $200k | $450 |
| Year 7 | $700k | $600 | $100k | $450 |
| TOTAL | $4,200 | $3,150 |
As the principal on the loan shrinks, the policy shrinks along with it. When the loan is paid off in year 7, the declining term policy expires, saving Carol $1,050 over seven years.
Meanwhile, the 10-year level term policy maintains a constant $700,000 death benefit and premium for ten years.
The savings offered by decreasing coverage is short-lived and should not be used by businesses with coverage needs lasting for a longer time.
Is Level or Decreasing Term Life Best?
Is Level or Decreasing Term Life Best?Declining term coverage may make sense to cover family debts in certain situations.
For those families with large mortgages or short-term debts, a decreasing-term insurance policy is often used to cover just those debts.
However, a level-term policy is likely the most straightforward and cheapest way to protect your family if you need more extended coverage.
Family situations are always fluid; there may be additional children. One child may go to the Air Force, passing off the cost of college to the government, but the other may go to Duke University, eating up those savings.
Most people don’t want to plan for their families like they plan their businesses, and level-term policies satisfy that simplicity.
Level-term policies are most popular with families because they provide a maximum of coverage at a minimum price, with no worry or concerns (until the end of the term).
Comparing various term life insurance plans can help you evaluate the costs and find the most appropriate policy for your needs and budget.
Most businesses work to reduce expenses, especially capital expenditures, and a decreasing term rider on a life insurance policy to cover the loan is precisely what the business owner ordered.
For business loans, a decreasing term policy is a perfect solution. It minimizes your cost, satisfies the bank’s requirement to give you that loan, and often does not require health examinations.
Affordable Life USA offers insurance solutions from many highly-rated life insurance companies providing declining coverage, such as Banner, Prudential, Protective, and John Hancock.
Many families reduce costs by using a decreasing term policy for mortgage protection and then adding a second permanent policy for their loved ones.
The cheapest permanent coverage is guaranteed universal life, popular with buyers of any age needing lifetime protection.
Younger buyers interested in policies emphasizing cash value accumulation may want to consider indexed, variable, and whole life insurance.
Finding the best life insurance policy for your family can often seem tedious, and we hope to simplify your efforts, saving you time and money.
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Affordable Life USA is a leading independent insurance agency offering comprehensive life insurance solutions to clients nationwide.
Eric Van Haaften, LUTCF
1-877-249-1358
