What Is Decreasing Term Insurance?

Decreasing term insurance is a type of life insurance policy where the death benefit gradually reduces over a specific period. It is designed to align with financial obligations that diminish over time, offering a targeted form of financial protection.

Understanding Decreasing Term Insurance

The core mechanism of decreasing term insurance involves a death benefit that progressively shrinks throughout the policy’s duration. This reduction often follows a predetermined schedule, which can be set to decrease monthly or annually. While the death benefit declines, the premiums for this type of policy typically remain constant for the entire term.

Policies are established for a fixed period, commonly ranging from 5 to 30 years. The rationale behind the decreasing death benefit is to match the diminishing amount of a financial obligation. As the policyholder repays a loan or other debt, their remaining liability decreases, and the insurance coverage adjusts accordingly.

Common Applications

Decreasing term insurance is commonly utilized to cover debts that naturally decline with regular payments, such as a mortgage. For instance, a homeowner might purchase a policy with a death benefit that mirrors their outstanding mortgage balance. If the policyholder passes away, the payout would be sufficient to cover the remaining loan, preventing the burden from falling on their family.

Beyond mortgages, this type of insurance is also applied to other installment loans, including car loans, personal loans, or even certain business loans. In these scenarios, the decreasing death benefit aligns precisely with the amortization schedule of the debt. This allows families or businesses to ensure that specific financial obligations are covered in the event of an unexpected death, without paying for more coverage than needed as the debt reduces.

Key Distinctions from Level Term Insurance

A primary difference between decreasing term insurance and level term insurance lies in the behavior of their death benefits. With level term insurance, the death benefit remains constant throughout the entire policy term. In contrast, decreasing term insurance is characterized by a death benefit that continuously diminishes over its duration.

Both types of policies typically feature level premiums, meaning the cost of coverage remains the same for the policy’s life. However, decreasing term insurance is often more affordable than a comparable level term policy. This cost difference stems from the insurer’s decreasing risk exposure as the death benefit, and thus their potential payout, reduces over time.