Broadly categorized; there are two types of life insurance: Term Life and Permanent Life. As the names show, the first one is temporary in nature while the other one covers you for life. Term life insurance is widely popular among the US citizens due to its affordable nature.
Term Life offers you insurance from 5-30 years range. It has somewhat leveled premiums and is really cheap compared to any permanent life insurance policy. Term Life keeps your beneficiaries covered if the policyholder dies within the specified term.
However, if he outlives his term life policy, he goes uninsured till he renews it, buys a new term life or convert his old term life policy into a permanent life policy. Another setback is that the dependents do not get any death benefit payout if he does not renew or convert his expired term life policy.
Term life has various types: Level term life, decreasing term life, ROP return of premiums term life, convertible term life, and renewable term life insurance policies.
- What is decreasing term life insurance?
- How does decreasing term life work?
- Why should you buy decreasing term life insurance?
- What is the estimated cost of decreasing term life insurance?
- How to choose the right decreasing term life insurance for yourself?
What is decreasing term life insurance?
Constant Depreciation of Life Insurance A typical gift life policy is one where the death benefit payment Slowly decreases in value after a predetermined period Before the policyholder purchases insurance and manually entering into the contract, the depreciation of the insurance decreases and this depreciation period is agreed. It should be noted that decreasing term life insurance is often used to cover a specific financial responsibility that lowers in value over time.
Depreciating life insurance policies are usually selected to match specific financial duties such as mortgage payments or other debts, which depreciate as they are paid incrementally Such a plan secure that cash payment is equal to with declining financial responsibility, provides enough protection for the policyholder’s loved ones Death benefit reductions are default and clear, This standardized approach by the policyholder and life insurance company the overall process of agreeing to the terms of the policy makes term life insurance deductible helpful for people trying to meet a specific decline in financial need, while still providing protection if it is valuable for for the beneficiaries.
How does decreasing term life insurance work?
More often than not, the coverage value decreases on a monthly or annual basis. The usual decrement chart is like this:
| Year | Decreasing Term Benefit |
|---|---|
| 0 | $5,00,000 |
| 5 | $4,00,000 |
| 10 | $3,00,000 |
| 15 | $2,00,000 |
| 20 | $1,00,000 |
| 25 | $0 |
In the table above, we have considered the example of a person who bought a decreasing term life with a coverage of $500,000 and his term was 25 years by his choice. The value of death benefit/coverage kept decreasing by $100,000 after every 5 years. This decrease in value and time period is decided by the company and policyholder together.
Why should you buy decreasing term life insurance?
Decreasing term insurance is often used to pay off one specific huge mortgage loan. It does not exceed a single buck above your life insurance needs to pay off a certain huge mortgage loan. Instead of paying off many expenses from a comprehensive and costly whole life, this is cheaper than even a term life policy.
Decreasing term life is the cheapest life insurance policy, only aimed at paying off one of your mortgage loans. If and when you take out the mortgage loan of say $50,000. It is advisable to buy a decreasing term life policy of $50,000; right afterwards. After every year you pay $5000 to pay it off without much hassle, for 10 years. The table would go like this:
| Year | Death benefit/ Coverage/ Mortgage Payments |
|---|---|
| First year | $50,000 |
| Second year | $45,000 |
| Third year | $40,000 |
| Fourth year | $35,000 |
| Fifth year | $30,000 |
| Sixth year | $25,000 |
| Seventh year | $20,000 |
| Eight year | $15,000 |
| Ninth year | $10,000 |
| Tenth year | $5,000 |
When you start paying off your mortgage loan, it has the same intervals and decreasing value. With every year, your outstanding mortgage loan decreases by $5000 and your coverage for decreasing term life decreases by $5000 too. If you die in the 7th or 8th year, the life insurance company will pay off the remaining $20,000 or $15000 directly to the mortgage lender.
To keep up your policy’s value, you have to keep paying the premiums till you live or your decreasing term policy expires. Usually the premium is not higher than $15 every month for decreasing term life.
If you outlive your decreasing term life, your mortgage loan is fully paid off and policy terminates. You’ve successfully managed to pay off the loan and you do not have to pay any more premiums.
It is recommended that you buy separate burial insurance for funerals, separate decreasing terms for paying mortgage loan, and separate health insurance to account for all medical expenses. These are cheap life insurance policies which keep you in charge. Instead if you buy a very expensive whole life, you pay 5-15 times more premiums and costs. This will save you money and you pay right!
What is the estimated cost of decreasing term life insurance?
It is cheaper than all other life insurance policies, if you start young, you might have to pay only $15 monthly premiums till your term lasts. It has somewhat the same cost as the level term life policy, though it is even less costly than it. However, monthly premiums stay fixed throughout your decreasing term life policy.
How to choose the right decreasing term life insurance for yourself?
Decreasing term life insurance policy is offered by reputed life insurance agencies like:
- Farmers Insurance
- Banner Life
- Prudential
- Protective
- John Hancock
To choose the one best-suited to pay off your mortgage loan, consult an independent insurance agent from NAPFA, National Association of Personal Financial Advisors; to seek professional counsel for the matter! To get a quote from Insure Guardian click here!
Which is better: Level Term Life or Decreasing Term Life insurance policy?
This is completely dependent on your individual life insurance needs. If you have a tight budget and number of dependents, and a mortgage loan to pay. You should choose Level Term Life since it has fixed death benefit payout for your beneficiaries.
But if you have a tighter budget and must pay off a huge mortgage loan and you do not want to burden your loved ones after your death. Pay it off with exactly the same coverage Decreasing Term Life insurance. This will help you operate on the lowest of budgets.
Honestly, if you do not have a lavish budget buy a cheap burial insurance, a pocket-friendly decreasing term to pay off mortgage loan, a cheap term life for death benefit payout for family members. This way you get all the minimum life insurance any sensible guy would need. A dumber guy would pay 15 times more for a whole life insurance policy to cover his dependents, burial, funeral cost, and pay off his loans. However, if you outlive your term life, your dependents go uninsured and without a death benefit but you lack budget, so take your chances!