Decreasing Term life insurance is a policy whose benefits decrease over time. These policies are often used by people who need to ensure a large debt, such as a mortgage or childcare expenses, will be covered in the event that the insured dies. For those that have the need, there are many benefits to buying this kind of policy.
With this type of coverage, a specific dollar amount of life insurance is purchased. Over a period of time, the benefit amount will decrease to a predetermined minimum and eventually expire. This is strictly a death benefit, which is payable to a beneficiary. The premium is usually a fixed amount that is paid monthly.
The length of time that the policy is in effect, or term, can vary between 10 and 30 years. This is called Level Term life insurance. The rate is guaranteed over the course of coverage. The exception is for Annual Renewable Term policies. For these, the policy renews each year, and the premium is based on one year. There is often an option of renewal, which is guaranteed for a set number of years.
An insured can designate the money to cover their financial obligations in the event of their death. Common uses include:
- Mortgage coverage
- Dependant child care expenses
- Educational expenses for dependant children
- Personal debt
- Funeral expenses
The downside is that while the premium remains the same, the value of the policy decreases annually. As opposed to whole life insurance coverage, a Decreasing Term policy is a temporary solution. The ideal situation in which this would be used is for there to be an adequate amount of money in savings at the expiration of the policy.
Decreasing Term life insurance is a popular choice among working class families. This is largely due to the relatively low cost. Whole Life or Universal coverage tends to be more expensive, since the benefit amount does not decrease.
However, beneficiaries do not receive the full cash value of Whole Life policies. They are only paid the face value. This increases the attractiveness of Decreasing Term policies, since the difference in premium could be invested elsewhere.
Decreasing Term life insurance is also helpful for those that expect to have accumulated a substantial savings upon their death. It protects other investments, such as an IRA, from being used to pay estate or inheritance taxes. As much as 80% of these benefits can be lost due to such expenditures.