Finding the right insurance policy can be tricky, especially considering many different options and researching you have to do. You will probably come across decreasing term insurance on your journey to find a suitable policy.
Decreasing term insurance is a type of renewable term life insurance, meaning the beneficiary can extend the coverage term for a set period and doesn’t need to re-qualify for a new coverage period.
In this policy, the range decreases over the life of the policy at a predetermined rate, which seemed appealing to people, so it is not surprising that this type of policy was popular.
Even though it sounds tempting, we want to consider every aspect before signing a contract.
Therefore, in today’s article, we will talk about:
- What is decreasing term insurance?
- For who decreasing term insurance would be suitable?
- How to buy decreasing term life insurance policy?
- Pros & cons of decreasing term insurance policies.
- Comparison between decreasing term life insurance and whole life insurance.
Let’s jump in!
What is Decreasing Term Life Insurance?
Term life insurance is a kind of insurance coverage that supports a death benefit for a particular time. For example, with a 20-year term life insurance policy, the level premiums and death benefits are constant during its term.
In contrast, decreasing term insurance, or DTA insurance, maintains a lowering death benefit simultaneously with premiums dropping. When people buy life insurance, they set a schedule for these amounts, which can be standard or customized between an insurance company and the insured.
To make it more precise, the crucial difference between decreasing term insurance and regular term life is the payout structure. With decreasing term policies, the death benefit drops while it goes up in other types of life insurance.
Due to face value or death benefit decreases over some period of time, the insurance provider must charge lower premiums in conjunction with the decreasing risk over time. It is generally cheaper than level-term life insurance.
So, if an individual wants to support their family, this policy may not be sufficient.
Why would someone want it – you might ask. Well, decreasing term insurance is generally used for covering a temporary financial obligation such as a student loan or mortgage.
For example, Mark bought a decreasing term insurance policy to cover his temporary financial liability. But, he died before the loan was paid off. After his death, the remaining death benefit is paid to his beneficiary.
Due to lowering death benefits, many people think this is a cheaper alternative. We will come to this later. Decreasing term life insurance is designed to cover a specific financial need, so it’s not strange that it’s also called mortgage protection insurance.
Besides the option to cover the specific financial needs, some decreasing term life policy also allows people to add on the terminal and critical illness riders. It’s usually without additional cost, enabling people to access their policy’s death benefit while still alive, but only in need to cover expenses like hospice care, hiring a caretaker, or residence at a nursing home. Using the rider is only possible if the policyholder is diagnosed with a terminal illness.
On the other hand, a critical illness rider is optional but usually comes with additional costs. This rider approves the policyholder to collect a portion of the death benefit for expenses, but the funds are in a tax-free lump sum.
How Does Term Life Insurance Work?
We already mentioned that people choose a coverage level and length when purchasing the policy. Decreasing term insurance covers for a specific period of time, but throughout the life of the policy, there are constant premiums. It’s similar to level-term life insurance.
Generally speaking, term life plans come in lengths of 10 to 30 years. After each year, the decreasing term coverage will be lower by a particular percentage of the original payout.
We will call for our example with Mark again to show how there would be a payment structure. If his 20-year plan had a $300,000 payout and a reduction rate of 5%, his payout would decrease by $15,000 (5% of $300,000) yearly.
Mark’s family will receive the total amount if he dies during the first year of insurance coverage. But each year after that, the payout will decrease by 5%. So, if Mark dies five years after buying a policy, the payout would be $225,000.
The reduction will continue yearly until the client passes away and the policy pays out, or the 20-years term ends. After 20 years, Mark’s payout will reach $0, and the policy will terminate.
Now it’s easier to see why decreasing insurance is often used for paying off the mortgage.
If Mark has a 20-year mortgage, he can buy a decreasing term life insurance policy and match the coverage amount and fixed period of the mortgage. Therefore, the mortgage and payout amount will decrease together.
There is the possibility of reducing the face value amount on level-term insurance if the individual pays off their debt and requires less coverage. It’ll depend on the insurance provider, so it’s best to check with them.
How to Get Decreasing Term Insurance?
When a person gets decreasing term life insurance, the wise first step would probably be to determine how much coverage to purchase. Everyone should also consider the financial need they want to cover if they die.
So, if Mark has a 20-year mortgage loan for $300,000, it makes sense to get a 20-year $300,000 decreasing term life insurance policy. Or even it would be wise to choose a policy that extends beyond the loan term to cover any potential payment delays.
Decreasing term life insurance is also offered by the life insurance company. Compared to other policies, a smaller number of companies have this type of policy in their offer.
The following is the list of companies that do offer decreasing term life insurance:
Who Should Consider Decreasing Term Life Insurance?
Since a decreasing term insurance policy can cover financial obligations, anything from business, mortgage, auto, student, to personal loans. It seems that this will be suitable for the majority of people.
Besides that, business owner often uses this type of policy to cover their business loans. It’s not rare for business partners to use insurance coverage to repay debt obligations if one of the partners dies. The death benefit from a decreasing term policy can help them continue operating or pay off the percentage of the remaining debt for which the departed partner is responsible.
But, it doesn’t offer a level death benefit, and the premiums do not reduce over time as the benefit decreases over time. If we have already decided to get a life insurance policy, it is sane to choose the option that can help us resolve financial problems but also helps our family or us in the future. It seems like a decreasing term life insurance forgot to incorporate its crucial element – the life insurance part like it isn’t a part of insurance products.
Pros & Cons of Decreasing Term Life Policy
Before signing any contract, understand all the advantages and disadvantages of decreasing life policy and its alternatives.
Pros
- Easily-understood. Unlike many other policies, the decreasing term is straightforward and doesn’t require a licensed insurance agent.
- Lower-cost premiums. This is the reason people choose decreasing term policy.
Cons
- Worse policy’s death benefit. With other life insurance policies, the family and loved ones would be more secure in case of the policyholder’s death.
- No cash value. Decreasing term policy doesn’t build cash value, meaning it doesn’t offer a savings account to borrow from or withdraw against.
- Upper age limit. Of course, this depends on life insurance companies and term length, but usually, the limit is an age of 50 for all term lengths. If the candidate is 60 or older, he might buy a 10- or 20-year term, not 30 years.
- Harder to get because not all insurance companies offer a decreasing term life policy.
Is Decreasing Term Life Insurance the Right Choice for You?
This is only your call and depends on your financial needs and overall lifestyle.
If you found that lower premiums are attractive but also want death benefit, you will have to find another way to cover that aspect, and you will pay as much as you would if you chose another type of policy.
We believe that the importance of death benefits is undeniable, so there is no logical explanation why someone would choose a life insurance policy that doesn’t offer a decent death benefit. Having an investment vehicle that can help you repay specific debt while also having life insurance coverage is a great idea. Still, the realization of that idea is far from ideal.
Thinking about finance is much like thinking about life in general – the mindset is crucial. Our goal is to show that it’s possible to have everything and there is no need to waive things that are important to you.
Before saying a final yes or no to decreasing term policy, get familiar with a much better alternative – The Whole Life Policy.
Whole Life Insurance Policy
Whole life insurance is one kind of permanent life insurance that guarantees you a death benefit while also offering a savings account.
Here are some specific characteristics of whole life insurance:
- Guaranteed death benefit. This is the most significant difference compared to decreasing term insurance policies. With a whole life policy, you have guaranteed death benefit no matter when you die. The only condition is to pay premiums regularly.
- Fixed premiums. The current situation in the world and increasing inflation show that this component is vital. Thanks to a fixed premium, you will pay the same amount of money on a monthly or yearly basis, as long as you live, despite the state of the market.
- Permanent coverage. You are insured for your entire life if you pay your premiums. Just a quick reminder, with decreasing term life, the maximum limit is usually 30 years.
Decreasing Term Life Insurance vs. Whole Life Insurance Policies
We highlighted the main advantages of the whole life policy and why we think it’s a superior alternative. You can build up on your cash value with a whole life policy. After every premium payment, your cash value is stored, automatically saving some money for yourself. This money can be used for retirement savings or your other needs, and you can access it as needed throughout your life.
If you buy whole life insurance from a company that ends the year in profit, it will also be a part of your deal! The total profit money goes back to the policyholders in the form of dividends. Dividends paid from a life insurance policy grow larger over time and are issued annually. So, besides a death benefit and opportunity to build your cash value, you also have an investment tool.
Tax benefits are one of the main advantages. With a whole life insurance policy, your cash value grows at a tax-free rate. It’s beneficial because you won’t have to worry about how taxes will work in years to follow. Also, when your beneficiaries get the death benefit, they won’t have to pay the income tax.
The cost of the whole life policy depends on your age, health, gender, hobbies, and family history. So, expenses will be much lower if you’re younger and healthier due to longer life expectancy! That is one of the reasons why it’s recommended to start early. If you start at a young age, you will pay as much as you would term life insurance but with more benefits. If you are older, term life insurance costs will be cheaper, but it will also be less coverage.
Overall, the whole life policy supports better financial protection for your family member and you.
Achieve All of Your Financial Goals With the Infinite Banking Concept
Okay, so far, we covered that with a whole life policy; you can have a permanent policy that has guaranteed death benefits and allows you to save money and incorporate it into retirement planning.
Fortunately, there is more!
With term life insurance, you do not accumulate cash value over time, so you can’t borrow money from it. The complete opposite is with whole life insurance.
The infinite banking concept, or over-funded life insurance, relies on a whole life policy and supports you to become financially independent. Except you have the freedom to access your money at any time, you can also take loans against the accumulated cash values.
By borrowing against a life insurance policy, your cash value grows and earns dividends. So, you are copying the traditional banking system without high-interest rates, loan agreements, interest charges, application fees, etc.
The best part? You have complete freedom to spend money as you wish. You can do anything from buy a house, go on a trip, or invest in something. With over-funded life insurance, you will achieve financial security for yourself, and you’re loved ones.
Final Thoughts
We know it’s almost impossible to pay off a mortgage or other debt by personal assets or income, but decreasing term life insurance isn’t the best option. When it comes to the question from the title ”Get it or forget it?” we will say FORGET decreasing term life policy.
Potentially saving a few dollars a month on your rate isn’t worth the tradeoff of leaving your family uncovered. Choosing a Whole Life policy is a much better way to take control of your personal finance.
If you’re ready to continue learning how the Whole Life policy can help you achieve all of your financial goals, watch our free masterclass. Here in Wealth Nation, we like to say – own your own lifestyle, or someone else will!