What is decreasing term life insurance?

When shopping for life insurance, you might have come across the phrase “decreasing term life insurance.” But what is it?

Well, it’s a bit of a misnomer, because it’s not the term that decreases — it’s the coverage. In short, you purchase a life insurance policy with a set amount of coverage, and during the life of the policy that coverage amount decreases.

Why would you want that? And is such a policy a good fit for you? Here’s what you should know about decreasing term life insurance, and whether it’s a good alternative to a traditional term life insurance policy.

Decreasing term life insurance vs traditional term life insurance

What’s the difference between decreasing term life insurance and traditional term life insurance (also called “level term life insurance”)? Let’s start instead with what they have in common.

Both types of life insurance offer coverage over a set period of time (the “term”). In exchange for monthly premiums, your insurer will offer your designated beneficiaries a death benefit equal to the amount of coverage you’ve purchased.

The idea is that, if you were to die before the end of the term, your loved ones would receive a lump sum of money to help them pay for your final expenses (like funeral or burial costs), plus ongoing costs like rent or a mortgage, groceries and bills, tuition and more.

With a decreasing term life insurance, the amount of coverage you buy will decrease over the life of the term, even though the premiums you pay remain the same. Your term might be anywhere from 5 to 30 years, and your coverage might decrease by a set amount (say, $100,000) or a set percentage (say, 5%) each year during the life of your policy.

Again, you’ll pay the same monthly premium early in your term (when the policy is worth more) as you will later in your term (when the policy is worth less).

Traditional term life insurance is a little simpler. In short, you buy a set amount of coverage, and typically you pay the same premium throughout the life of your policy.

Let’s say you’re a 25-year-old woman in excellent health. You can buy a 25-year term life insurance policy worth $500,000 from Haven Life for $19.15 / month. If you die after three years, your policy is worth $500,000. If you die in 24 years, your policy is still worth $500,000.

Cost of decreasing term life insurance vs traditional term life insurance

While we’re on the topic, let’s break it down even further. Decreasing term life insurance policies often have similar or slightly lower monthly premiums than a level term life insurance policy.

But again, you have to look at what you get for your money — by the end of a decreasing term life insurance policy, you’re paying the same amount of money for far less coverage than you were at the start.

With a level term life insurance policy, you will pay the same premiums over the life of the policy. In fact, because many people buy life insurance for the years when they’re young and healthy, you can lock in a low rate that, for many people, is less than you pay every month for coffee or streaming services.

All in exchange for a significant amount of coverage that your loved ones can use to pay for literally anything they need or want in the event that you die during your policy’s term. Here are some example rates of what someone in excellent health might pay per month for Haven Term:

What does decreasing term life insurance cover

In general, the idea behind life insurance is that, if you have people who depend on you to pay for things (housing, groceries, bills), a policy helps ensure that those people will have money to pay for those things in the event that you’re not around.

Decreasing term life insurance works that way. If you die during the term, your designated beneficiary (typically your spouse) will receive a lump sum payout that they can use however they see fit.

For most people, however, decreasing term life insurance is a form of mortgage protection insurance. The idea is that, if you were to die shortly after taking out a mortgage, your loved ones would still owe quite a bit of money on your house. But if you die later on in your mortgage, your family would need less money to pay it off. That’s why the coverage amount (i.e., the death benefit) decreases over the term of the policy.

But think about it: Even if you’re paying off your mortgage over time, you probably have other expenses to consider. In fact, due to both inflation (even in “normal” times) and increased cost of living, you might actually have more expenses toward the end of your policy than less.

That’s the idea behind traditional, level term life insurance. A good rule of thumb is to purchase a coverage amount worth 5 to 10 times your annual salary. This is so your loved ones can continue to pay off that mortgage, while still having money left over for day-to-day expenses, end-of-life expenses, and other associated costs that come with everyday life.

When is decreasing term life insurance the right choice?

While traditional level term life insurance is a smart and affordable choice for many people, there are a few instances where decreasing term life insurance might make sense. Here are those instances:

If you have a mortgage (and few other expenses)

Owning a home is the American dream. To finance it, most people take out a mortgage and pay it off over time — typically from 15 to 30 years. Every year, you’ll owe a little less. A decreasing term life insurance policy can be used as mortgage protection insurance, with a coverage amount that decreases over time alongside your mortgage debt.

The advantage of this is you only pay for the coverage you need. The disadvantage is that, if you have any other expenses, your policy won’t provide coverage for them, potentially leaving your loved ones to pay for them in your absence.

If you have a small business loan (and few other expenses)

Everything we’ve written about a mortgage above applies to a small business loan.

Again, you’ll owe more at the beginning of the loan than you will at the end. A decreasing term life insurance policy can provide the coverage you need for the loan in case you’re not alive to pay it off. Again, the pro is you pay for only the coverage you need. Again, the con is that if you have any additional expenses, they might not be covered by the policy.

If you have other types of debt (and few other expenses)

If you have a student loan, personal loans, or other types of debt, and if you have few other regular demands on your bank account, a decreasing term life insurance policy can be an affordable way to get coverage in case your debt outlives you.

What’s best for you and your loved ones

For many people, a decreasing term life insurance policy will not provide the coverage your family will need if something happens to you, and you’re no longer around to pay for the necessities of life.

Traditional level term life insurance is an affordable alternative. You pay the same monthly premium over the life of your policy, and the coverage amount remains the same. With a little careful planning (including using a free online life insurance calculator), you can determine the amount of coverage you need, and how long you’ll need it.

Whether you’re taking out a mortgage, starting a family (or planning to), or have other long-term expenses you want covered in case the worst should happen, term life insurance can provide financial protection for your loved ones. Begin your journey toward peace of mind with a free online quote today.