Decreasing Term Life Insurance

What You Need To Know about Decreasing Term Life Insurance

Decreasing term life insurance is designed to remedy a common complaint charged against ordinary term life: ever-increasing premiums. Like other forms of term life, decreasing term offers temporary coverage in amounts ranging from $100,000 to $10 million. The yearly cost, or premium, is calculated based on the insured’s age and age and the desired coverage amount. Terms can last from as little as 5 years, through 30 years. Premiums for decreasing term are kept constant by lowering the coverage amount every year.

Decreasing Term Life Example

Jane is a single mother with a 10-year-old child and blossoming career. A recent divorce has left her the sole income-earning in the household, putting her child at risk should anything happen to Jane. To protect against this possibility, Jane purchases a 10-year decreasing term life policy with $500,000 — 10x her annual income. Jane settles on decreasing term because she likes the security of level, guaranteed premiums and she figures her child will be self-sufficient by the age of 20. Given her promising career, Jane expects to double her income in 5 years and start a savings account for her child. As the 10-year-mark approaches, Jane’s $500,000 policy drops to $300,000 in order to keep her yearly premiums level. This is okay for Jane because her son now has a job and she’s built up a substantial savings. By going with decreasing term life Jane saved herself a lot of money on premiums and received adequate coverage when she needed it most.

Difference Between Decreasing Term Life and Other Types

Decreasing term features constant premiums, like level term, but the premiums are lower on the whole. That’s because, whereas level term averages out mortality charges across the period of insurance, leading to higher premiums during the first half of the term, decreasing term covers rising mortality costs at the expense of one’s coverage. Every year, as mortality charges increase, a decreasing term policy lowers the total death benefit by exactly the amount necessary to keep premiums constant. With a decreasing contact the policyholder might start off with $500,00 of coverage the first year and end up with $200,000 over coverage by the time it expires 20 years later.

Who Should Buy Decreasing Term Life?

Decreasing term life insurance is best for individuals who have a diminishing need for life insurance. Fortunately, this is typically the case. As you age your dependents become increasing self-sufficient and the risk losing income vanishes entirely at retirement. If you can accurately estimate a temporary and diminishing need for coverage and you want the absolute lowest up front investment with level premiums, decreasing term life is perfect for you.

Alternatives to Decreasing Term Life Insurance

Those looking for a consistent death benefit throughout the full span of their contract are good candidates for any of other variants of term insurance, including level and standard term life. Level term life is slightly more expensive but it offers all the benefits of decreasing term life, minus the yearly-decreasing coverage. Standard term life rates are as low as decreasing term life, but be prepared to pay ever-higher premiums each year. For permanent coverage with saving growth options consider a permanent policy like whole life or universal life.

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