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what decreases in decreasing term insurance

what decreases in decreasing term insurance

2 min read 05-02-2025
what decreases in decreasing term insurance

Decreasing term insurance is a type of life insurance where the death benefit gradually reduces over time while the premiums remain level. This type of policy is often used to cover a mortgage or other debt that decreases over time. But what exactly decreases? Let's break it down.

Understanding Decreasing Term Life Insurance

The key feature of decreasing term insurance is its decreasing death benefit. Unlike level term life insurance where the payout remains the same throughout the policy term, the death benefit in a decreasing term policy steadily declines. This decrease is usually pre-determined and outlined in the policy details. The premiums, however, remain constant for the policy's duration.

What Decreases?

The primary thing that decreases is the death benefit or the amount your beneficiaries receive upon your death. This amount is directly tied to the outstanding debt or obligation the policy is designed to cover. As the loan or debt decreases, so does the insurance payout.

What Stays the Same?

While the death benefit decreases, the premium remains consistent throughout the policy's term. This predictability is a significant advantage for budget planning. You know exactly how much you'll pay each month, even as the coverage amount goes down.

How the Decrease Works

The decrease in the death benefit isn't arbitrary. It's typically structured to mirror the reduction of a specific debt, such as a mortgage. For example:

  • Year 1: Death benefit = $200,000 (total mortgage balance)
  • Year 5: Death benefit = $150,000 (mortgage balance after five years of payments)
  • Year 10: Death benefit = $100,000 (mortgage balance after ten years)
  • Year 25: Death benefit = $0 (mortgage fully paid)

This structured decline ensures that the insurance payout always covers the remaining balance of the debt.

Advantages of Decreasing Term Insurance

  • Affordability: Because the death benefit reduces, the premiums are generally lower than those of level term life insurance with the same initial death benefit.
  • Simplicity: It's designed to address a specific debt, making it straightforward to understand and manage.
  • Debt Protection: It provides peace of mind, ensuring your loved ones are protected from the financial burden of the debt should you pass away unexpectedly.

Disadvantages of Decreasing Term Insurance

  • Limited Coverage: The decreasing nature of the coverage means it only addresses a specific debt. It won't provide broader financial protection for your family.
  • No Cash Value: Unlike whole life insurance, decreasing term insurance doesn't accumulate cash value.
  • Inapplicability for all debts: This type of policy won't work for debts that don't decrease over time, such as credit card debt.

Is Decreasing Term Insurance Right for You?

Decreasing term insurance is a specialized product best suited for individuals with a specific debt they want to cover, such as a mortgage. Before purchasing, carefully consider your financial needs and whether this type of policy adequately addresses them. Consult with a financial advisor to determine the best life insurance strategy for your specific circumstances. They can help you compare decreasing term with other options like level term or whole life insurance to find the best fit for your individual financial situation.

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