What is Decreasing Term Insurance?

Alexis W.
Alexis W.
Man climbing a rope
Man climbing a rope

Decreasing term insurance is a kind of life insurance in which the death benefit gets smaller as the term of the insurance goes on. For example, if the insurance is purchased for a 30-year term, the value of the death benefit if the individual dies one year after the policy was purchased will be much higher than the value of the death benefit if the insured dies 29 years after the purchase. Most often, decreasing term life insurance comes in the form of mortgage life insurance, although other term life policies can also be written as decreasing term insurance.

Term life insurance in general is an insurance product that provides coverage only for a specified period of time. The insured individual selects a term for which he needs coverage, and the insurance company calculates the statistical likelihood of his dying during that period to determine the amount he must pay in premiums. If the person dies during that term — say 30 years — the beneficiary named in the policy receives a death benefit. If the person doesn't die during that term, the insurance either expires at the end and no benefit will be paid if he subsequently dies, or the person has the option to renew the policy for another term or to convert to a whole life policy, which would provide coverage for the rest of his life.

Most standard term life insurance policies provide for a uniform death benefit to be paid if the insured dies at any time within the term of coverage. For example, in a standard 30-year policy with a $100,000 US Dollar (USD) death benefit, the beneficiary would receive $100,000 USD if the insured died at any time in the 30 years. With decreasing term insurance, however, the death benefit would go down the longer the individual had insurance. As a result, the premiums on a decreasing term insurance type of policy might be set at a lower rate.

A decreasing term insurance policy is generally not sold as a standard life insurance policy; however, those who purchase mortgage insurance are essentially purchasing this type of policy. Mortgage insurance is a policy that stipulates that the insured's home mortgage will be paid off upon his death. This mortgage payoff is the death benefit, instead of a lump sum cash payment. As a person pays a mortgage down over the years of his life, the balance required to pay off the mortgage gets smaller. As such, since the benefit paid by the insurance company is the remaining balance on the mortgage, the benefit gets smaller.

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