Decreasing term life insurance is a policy in which the benefit decreases monthly or annually. the policy size continues to decrease until the policy pays out or until the end of the coverage period. A decreasing term life insurance policy generally works best to cover a loan or other financial obligation that will reduce in size over a known period of time.
For example, if you only want enough life insurance to cover your mortgage so your family can keep your home after you pass away, the death benefit of a decreasing term policy could be structured to decrease as you age. pay the outstanding balance balance. Because of this reduction in the death benefit, declining term life insurance is often less expensive than a term life insurance policy.
how does declining term life insurance work?
Decreasing term insurance, also known as DTA insurance, is different from a standard term policy, or level term life insurance, in the payment structure. While a level term life insurance policy has a face value that remains constant over the life of the policy, the death benefit decreases monthly or annually for declining term insurance. however, the two policies are similar in that they both have constant premiums and term periods that generally range from five to 30 years.
additional clauses for terminal and critical illnesses
Most declining term life insurance policies come with or allow you to add additional riders for terminal and critical illness. a terminal illness rider is usually included at no additional cost and allows you to access your policy’s death benefit while living if you need the funds to cover expenses such as hospice care, hiring a caregiver or residence in a nursing home of elderly. the money is usually paid as needed and can be up to 80% of the death benefit. however, you will not be able to use the rider unless you have been diagnosed as terminally ill, meaning you have a condition that leaves you with less than 12 months to live.
A critical illness rider, on the other hand, is optional and often costs extra when added to a decreasing term insurance policy. This clause also allows you to collect a portion of the death benefit for expenses, but the funds often come in a tax-free lump sum. The life insurance company usually determines if you are seriously ill, and a diagnosis is only considered if you have had a serious problem, such as a heart attack, ALS, kidney failure, stroke, or cancer. Insurers vary in their list of different conditions that are included in the rider, so we recommend researching the providers’ critical illness policy.
why buy declining term life insurance?
If you’re looking for life insurance to cover debts, loans, or financial obligations, then declining term life insurance can be a tool to cover obligations like these that decrease in size over a fixed period of time. A declining term policy can help ensure that your beneficiaries receive enough money to pay off the remaining portion of the debt after your death. Some debts you could use decreasing term insurance to cover include:
For example, the term life insurance policy’s death benefit reduction can be structured to match your outstanding mortgage and, since mortgage payments are made periodically, the face value of the policy would decrease. if you were to die, the policy would pay your chosen beneficiary, who could then pay the outstanding mortgage.
In this way, decreasing duration insurance policies are similar to mortgage or credit life insurance policies. however, credit life insurance policies name the lender as the beneficiary, which is usually the bank. Declining term life insurance policies differ in that they allow anyone to be named a beneficiary. you may want this flexibility to let your loved ones decide how to allocate death benefit funds instead of having the money go directly to the bank.
Similarly, when small businesses apply for operating loans, owners can purchase declining term life insurance in the event one of their own dies. this would help ensure costs continue to be paid.
In addition to coverage for loan payments, you may want a decreasing term life insurance policy if your financial obligations will decrease over the term of a policy. For example, if your children are going to college or starting their first job, you can expect less need for life insurance coverage in the next five to 10 years. In this case, a policy like declining term life insurance, where the death benefit starts out large and then gradually decreases over time, may provide the best guarantee.
declining cost of term life insurance
A level term life insurance policy generally costs more than a declining term life insurance policy. Since the death benefit of a decreasing term policy is reduced each period, the insurance company will not require such high premiums from you because of the decreasing risk it presents. It is important to remember that the premiums of both types of policies are constant throughout the term life.
choosing the best declining term insurance
The availability of declining term life insurance has decreased in recent years, but it is still available from some reputable insurance companies. Farmers, Banner Life, Prudential, Protection Life, and John Hancock all offer declining term insurance policies. farmers insurance, for example, offers a policy with coverage starting at $25,000 available in terms of 15, 20, 25 and 30 years.
When looking for the best decreasing term insurance for you, you’ll want to choose a policy that covers unpredictable situations. For example, purchasing coverage that extends slightly beyond the term of your outstanding mortgage can be helpful if you ever have to delay mortgage payments. It can help to think about possible situations like this ahead of time so you can choose the best possible coverage.
While shopping for insurance coverage, we also recommend comparing quotes from multiple insurance companies to make sure you’re getting the best rates possible. life insurance companies screen applicants differently, for example, if you have a pre-existing condition, you may get a significantly cheaper rate with one insurer than another.
when should you choose level term life insurance
Leveled term life insurance gives your beneficiaries additional flexibility to cover unplanned expenses if you die. For example, you can purchase a policy that is large enough to cover the mortgage (such as declining term insurance), and as your outstanding balance decreases, your family can use the excess coverage as they see fit. the money could go toward any number of expenses, including education, food, travel, and/or unforeseen financial problems.
In addition, level term insurance provides you with a consistent and higher death benefit over the life of the policy. Unless you’re sure your need for life insurance will decrease over time, we recommend using a more stable policy, such as level term life insurance.
Once you’ve purchased life insurance coverage, you won’t be able to increase your coverage if your financial needs change without purchasing a new policy or going through a new scheduled exam. Also, if you pay off your debt and require less coverage, it is sometimes possible to reduce the face value amount on level term insurance depending on the insurance provider.