Decreasing term life insurance
Reviewed by
If you’re focused on getting life insurance to help cover a specific financial obligation or debt, such as a mortgage, then a decreasing term life insurance policy could be a good option. These policies are designed to gradually decrease the death benefit over time. This temporary coverage can be quite cost-effective, but it’s not right for all situations. Is it right for you? Take a few minutes to learn more about:
How decreasing term life insurance works
Understanding the benefits and drawbacks
How it compares to other types of life insurance
Deciding if decreasing term life insurance is right for you
What is decreasing term life insurance?
There are permanent policies, such as whole life, that provide lifelong protection and term policies that have a predetermined beginning and end. Decreasing term life insurance is a specialized form of term life insurance, so it only provides protection for a specific period (the "term"), typically between 10 and 30 years. Once a term policy expires, your insurance coverage is over.
“Decreasing” refers to the amount of money paid out as the death benefit, or the amount your beneficiary receives after your death. With decreasing term life, the death benefit starts at one amount and gradually decreases over time, according to a set schedule. This type of policy is usually purchased to protect a major asset such as a family home, because it can be used to pay off any outstanding mortgage balance. It can also cover other types of financial obligations that decrease over time, such as a business or personal loan.
An example of how decreasing term life works
You purchase a $400,000 decreasing term life policy to help your family pay the remaining balance on your mortgage if you pass away. If you have 20 years left on your mortgage, you choose a 20-year term because once the loan is paid off, you no longer need that coverage.
Every year, the payable death benefit decreases by a set amount until the end of the term, when it's reduced to zero. Depending on the terms of your contract, your monthly premiums might remain fixed over that term, or they could decrease as the death benefit gradually diminishes.
If you were to pass away near the beginning of the 20-year term, your family would receive close to the full $400,000 death benefit amount, enough to pay off the outstanding mortgage principal. After 10-12 years, the payout would be about half that – around $200,000 – because you’ll have paid off a significant amount of your mortgage. In year 19 – near the end of the term – the death benefit would be significantly reduced, to perhaps just a few thousand dollars (or less) because the mortgage will almost be paid off at that point.
Benefits to decreasing term life insurance | Drawbacks to decreasing term life insurance |
|---|---|
Cost-efficiency: Policy premiums are usually less expensive for decreasing term life than regular term life coverage because of the decreasing death benefit. The insurance company is less likely to have to make a full benefit payout, so the cost of coverage is lower. | Limited availability: Decreasing term life isn't as common a policy type as other kinds of coverage, so you may have to shop more to find the right fit. |
Asset protection: Decreasing term life can be used to protect specific assets, such as a home or business partnership, and can be separate from or in addition to other life insurance you have. | Coverage expiration: Unlike many regular term policies, these policies cannot be converted to a permanent policy. Coverage is temporary and will expire at the end of the policy term. |
Flexibility: This type of protection provides flexibility for covering obligations that decrease over time. It may also be used to protect family members whose income is expected to grow during the coverage period. | No cash value: Term life policies, including decreasing term life, do not have a cash value component like permanent life insurance. That means once your policy expires, there's no accrued cash value and no return on all the money paid in premiums. |
How decreasing term life compares to other coverage
Knowing how decreasing life insurance compares to other types of policies can help you decide which might be best for your needs. Here are some key differences with other popular types of coverage:
Level term: With level-term life insurance, the premiums remain the same (level) over time, and the full death benefit is guaranteed to be paid out until the policy expires at the end of the term (assuming premiums are current). This is one of the most popular types of term life insurance. Many level term policies are also convertible: they can be changed from term life to permanent whole life insurance without a medical exam, providing additional flexibility.
Renewable term: These policies typically have shorter terms of 1-5 years, which can be automatically renewed without requiring a new medical exam. The death benefit remains at the same level, but premiums are not: at each renewal (or in some cases, every 3-5 years), your premium payments can and will rise.
Increasing term: This fairly rare form of coverage is the opposite of a decreasing life insurance policy, with a death benefit (and premiums) that rise over time. It can be helpful for those with increasing expenses or as a way to protect against rising inflation.
Decreasing term | Level term | Renewable term | Convertible term | Increasing term | |
Death benefit | Decreases over time | Remains the same | Remains the same | Remains the same | Increases over time |
Premium | May decrease over time | Remains the same | May rise after renewal | Rises after conversion | Increase over time |
Coverage | Expires at term end | Expires at term end | Renewable with a new end date | Permanent after conversion | Expires at term end |
Cash value | No | No | No | Starts to build after conversion | No |
Is decreasing term life right for you?
Decreasing term life is a fairly rare form of coverage, partly because it may not be a good fit for most life insurance needs. Other types of coverage may be a better choice if you:
Have multiple financial obligations, as opposed to one specific debt you’re concerned about
Want financial protection that can help support your family if you unexpectedly pass away
You want permanent lifelong coverage, as opposed to temporary protection
You’re interested in earning dividends or accruing cash value.1
On the other hand, it may be a good idea to consider getting (or adding) a decreasing term life policy in these scenarios:
You want coverage for a specific use, such as covering mortgage payments or a business loan
Your financial dependents are on their way to becoming financially independent and require less financial support over time
You own a small but growing business and want a temporary financial cushion in the event of your death.2
No matter which type of life insurance you decide is right, it’s a good idea to shop around for insurance quotes and compare options before getting coverage.
Need help choosing the right policy?
Let Guardian help. Guardian can connect you with a financial professional who can show you your options and help explain the various advantages and disadvantages so you can choose the right coverage for your needs. But however you decide to get coverage, don't put it off: Premiums get more expensive as you age, so it's a good idea to start the process sooner rather than later.