Decreasing Term Life Insurance

Decreasing term life insurance is intended to fulfill an insurance need that decreases over time in a predictable, systematic way. The face value of the policy – the death benefit received by the beneficiary(ies) of the policy – gets progressively smaller over time. Finally, it disappears altogether at the end of the policy term. The end of the policy is timed to coincide with the cessation of the insurance need.

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The Classic Example

The clearest and most common example of this kind of insurance need is associated with a home mortgage. Indeed, a particular type of decreasing term life insurance is called mortgage life insurance. A mortgage is amortized according to a prearranged schedule. Mortgage debt is temporary, substantial and long-lived – just the type of insurance need that is best met by term life insurance. Mortgage life insurance begins with a face value equal to the outstanding mortgage balance. As the mortgage balance falls, the face value of the policy is reduced in tandem with the balance. The reductions may occur monthly or yearly. The final year of the policy is also the scheduled payoff year for the mortgage. Policy premiums remain level rather than decreasing as coverage decreases. The level premium may be either larger or smaller than the premium on a standard term-life policy with a face value equal to the beginning face value of a decreasing term life insurance policy. Comparing the two policies, however, is harder than it may seem at first glance.

Premium Comparisons Between Decreasing Term and Standard Term

It would be incorrect to simply compare the level premiums of a standard term life policy and a decreasing term life policy. In one case, the face value remains the same over time; in the other case, face value decreases over time. A more meaningful comparison can be made by calculating the “cost per thousand” dollars of face value. By this measure, decreasing term life insurance isn’t nearly as cheap compared to standard term life. The numerator of the “cost per thousand” ration is the level premium and the denominator is the face value of the policy. With decreasing term life insurance, the numerator stays constant over time while the denominator decreases. This implies an ever-increasing cost per thousand. Meanwhile, the cost per thousand stays level for level-premium term life.

Total Insurance Need and the Decreasing Term Component

The decreasing-insurance-need component may be only a part of total insurance need. The other components may not possess the decreasing-balance element associated with a mortgage or loan. This can be a major headache when attempting to fulfill the total insurance need using decreasing term life insurance. The danger in this approach is that it may lead to being either over-insured or under-insured, depending on the size and properties of the non-decreasing insurance needs.

The upshot of this analysis is that clashing or competing insurance needs (non-decreasing in scope) may dictate the use of standard term life insurance even though the face value of the policy does not fall over time. Recent years have seen steady decreases in premiums for standard term-life policies, which further increases the likelihood that standard term life would be preferable to decreasing term life.

Good Candidates for Decreasing Term Life Insurance

Consider the case of a single individual who has nobody dependent on his or her income yet who still has an insurance need. The insurance need might arise because the individual wants to preserve a legacy for a loved one against liquidation to satisfy a claim against the estate lodged by a lender. (The loan might be a home mortgage or a different kind of loan.)

This individual is a particularly good candidate for decreasing term life insurance because he or she may have only this one (decreasing) insurance need. After all, there is no spouse or children to give rise to competing insurance needs. This should permit precise calibration of the amount and duration of the insurance to the decreasing need. This is the made-to-order situation for decreasing term life.

Another example might be a couple nearing retirement who assumes a large mortgage in order to acquire their “dream house.” With children having grown up and retirement looming, this mortgage may well constitute all or most of their insurance need. Once again, decreasing term life insurance should precisely calibrate the policy to their need.

Still another example might be a business with a decreasing insurance need tied to a loan or debt security. The business may well lack the competing insurance needs that sometimes make decreasing term life insurance problematic.

Circumstances Conducive to Decreasing Term Life Insurance

The chief effect of inflation is to reduce the purchasing power of money. In turn, this reduces the real value of debt. In turn, this penalizes the use of standard term insurance to fulfill a decreasing insurance need. At a moment when prices and total expenses are rising, income is diverted to insurance that could be more efficiently employed in purchasing other goods. A decreasing term life insurance policy with a level premium lower than that of a standard term-life policy would benefit the policyholder.

Decreasing term life insurance is sometimes available as a rider to a standard term policy. Decreasing-term policies often include options such as waiver of premium, critical-illness payout and terminal-illness payout. Waiver of premium pays the premium if the insured becomes disabled. Critical illness pays a lump-sum benefit upon diagnosis of a critical illness, while terminal illness pays the face value of the policy upon diagnosis of the insured’s terminal illness. These options increase the value of a decreasing term life insurance policy.


Decreasing term life insurance can be a valuable tool in fulfilling a decreasing insurance need. Problems posed by the existence of simultaneous non-decreasing insurance needs may argue in favor of a standard term-life policy, however. Still, there are various scenarios in which decreasing term life insurance may well be superior to standard term life. Single individuals and businesses that lack clashing, non-decreasing insurance needs are good candidates for this type of life insurance.

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