Burtnett Insurance Agency Blog
Burtnett Insurance Agency Blog
If you've been looking at life insurance policies, you've probably heard a number of different terms used at this point: whole life, universal life, permanent, level term, and so on. While these can all be great coverage options, the list isn't quite complete! Decreasing term life insurance is yet another type of policy available and while it shares many features with its counterparts, it is quite different. But what is decreasing term life insurance, exactly, and how does it work? Who is it right for and, perhaps more importantly, is it right for you? Let's find out!
What exactly is decreasing term life insurance?
There are many different types of life insurance, so learning the particulars of each can be tricky. To get a better understanding of how a decreasing term policy works, let's take a look at some of the specifics and compare them to other life insurance products.
How does a decreasing term policy work?
As the name suggests, the death benefit of a decreasing term policy does just that: decreases. Like a level term policy, decreasing term policies often come with varying death benefit amounts and are available in various increments, such as 15, 20, 25, or 30 year plans.
After selecting the policy particulars that are right for you, you would pay the premium, and over time, the death benefit of the policy reduces at a predetermined rate, usually each year. In the event that you (the policyholder) should pass during that time, the benefit is then paid to the beneficiary.
So how is the rate determined? Unfortunately, there isn't a simple standard formula that can tell you exactly the amount the benefit decreases each year, or the rate at which it decreases. Like many things in the world of insurance, there are a variety of factors that are taken into consideration, such as the age of the applicant, their health, and the amount of life insurance coverage. However, the rate, as well as other policy specific information, should be made available to you after you request an initial quote from the insurance company.
How is it different than other life insurance policies, like level term?
In a previous blog, we discussed the differences between term and whole life insurance. Whole life policies are a type of permanent life insurance, which remain in effect as long as the policyholder pays the premiums. As mentioned, both level and decreasing term policies cover you for a specific period of time.
Level and decreasing term policies also both have fixed premiums for the duration of their terms. However, the death benefit of a decreasing term goes down over time, whereas a level term policy stays the same over the life of the policy.
You might ask yourself, "Why would anyone want a benefit that decreases?" That is a reasonable question, and we'll discuss why that might actually work towards your benefit in just a moment.
Terminal or critical illness rider
Some insurance carriers also offer something called a "critical or terminal illness rider" which can be added on to the decreasing term policy, and is usually added at no additional cost.
Terminal illness riders give the policyholder the ability to access some portion of the death benefit while they are still alive in order to cover major medical costs or other related expenses. However, the benefit would only be paid out if the policyholder has been diagnosed with a terminal illness.
A critical illness rider is similar, but may pay the amount in a single lump sum, whereas the terminal illness rider may be paid in installments, or as needed. In either case, the insurance company determines whether or not an illness or diagnoses is sufficient based on specifics outlined in the rider itself, and will likely vary between insurance providers. Finally, it is important to note that in some cases, a terminal or critical illness rider may only pay up to a certain percentage of the total death benefit.
Why should someone consider buying a decreasing term policy?
As we mentioned, the death benefit of a decreasing term policy goes down over time, but the premium stays the same. So why would you choose that over a level term policy? Let's take a look.
Simply put, a decreasing term policy is often a more affordable option than a level term policy.
Because the death benefit decreases over time, you're usually able to get a similar amount of coverage for a lower premium. For that reason, a decreasing term policy can be a way for an individual to get affordable coverage when the premiums of a similar level term policy may be cost-prohibitive.
Furthermore, you may also be able to get a substantial amount of coverage without having to go through many of the same medical exams required by level term applications. Of course, this depends on the insurance carrier, and possibly your age, too.
To cover debt and other financial obligations
For many families, debt and other financial obligations typically decrease over time and thus, your need for a higher amount of coverage decreases, too. For example, if you are just starting a family, you probably have a fair number of financial obligations and loans. You have a mortgage, a car payment, and of course, the cost of raising a child. During that portion of your life, you certainly need a much larger amount of coverage.
However, at some point, you'll pay off your car, make that last mortgage payment, and see your you child graduate from college and move off to build a life of their own. At that point, you likely don't need the same amount of coverage. While it certainly doesn't hurt to have the extra coverage provided by level term insurance, it may be the case that a new family can't afford the premiums, or otherwise need to find a more budget-friendly policy. In such a circumstance, a decreasing term might be a great option.
Yet another use case can be found in the world of small businesses. When two or more people start a business together, they might find that a decreasing term policy is perfect for covering loans and other business expenses in the event that one of them should pass before they are paid off.
How is a decreasing term policy different than credit or mortgage insurance?
Some insurance carriers offer policies that are specifically designed to cover certain types of debt. For example, there are policies called "mortgage insurance" policies that specifically cover your mortgage in the event that you pass. Similarly, you can purchase insurance to cover other large amounts of debt, too.
A decreasing term can be designed to match your mortgage, too, but one of the main differences between those policies has to do with who receives the benefit in the event of your passing (i.e. the beneficiary). In the case of mortgage insurance, the death benefit will more than likely go to the mortgage lending company or the bank rather than a spouse or loved one.
While the death benefit from a decreasing term might go to the bank anyway, it's hard to know exactly what your family may need in the event of something so unexpected and there a number of reasons you may want the payment to go to them rather than the bank. Maybe you are further along in your mortgage payments than you thought you might be, or perhaps your family needs the benefit for some unforeseen expense. In any case, a decreasing term policy would allow you to name a spouse or loved one as the beneficiary, which means they can decide how to allocate the funds.