In this article, we explain why for most people buying level term life insurance is a better financial decision than purchasing a decreasing term life insurance policy.
We also offer you a strategy for buying multiple life insurance policies (called laddering) to ensure you’re paying the right amount for life insurance only when you need it.
What is decreasing term life insurance?
You’re probably wondering what decreases when you buy a decreasing term life insurance policy. The answer is the death benefit.
Maybe you’re wondering what a death benefit is?
Fair enough. Most of us don’t often link the words death with benefit very often in our daily life.
Length of Coverage + Death Benefit = Cost of Life Insurance
When you buy any type of life insurance policy, you will make two basic choices:
Your answer to question one is the length of your term. You can choose to insure yourself for a period of time that will end after a certain number of years (term life insurance) or your entire life (whole life insurance).
Your answer to question two is the amount of coverage you wish to buy which is the death benefit. Quotacy, for example, sells life insurance policies ranging from thousands of dollars upward to $65 million+.
» Calculate: Life insurance needs calculator
In general, the longer your life insurance policy lasts, the higher it costs. This is also true for policy coverage amounts. A life insurance policy with a $1,000,000 death benefit will cost more than one paying a death benefit of $750,000.
Decreasing Your Death Benefit to Save Money
If you decide to buy a decreasing term life insurance, your death benefit will gradually decrease over the time you own your policy.
This means that either monthly or annually the amount of money that will be paid to your family upon your death lessens as time goes on.
Why would you want less money to go to your family?
As with most things, it has to do with potentially saving some money. Let’s help you understand how decreasing term life policies work and why people sometimes buy them.
How does decreasing term life insurance work?
Decreasing term life insurance policies are available for terms lasting from one to 30 years.
Usually people buy a decreasing term life policy that lasts only for the amount of years that they need to cover a specific debt—a home mortgage, car financing, or student loans, for example.
As your loan amount will decrease over time as you repay it, the death benefit of your decreasing term life insurance policy can decrease as well.
The logic behind this is that you don’t want to be overinsured or pay more for your life insurance than you need to.
Decreasing term life insurance policies can be less expensive than a standard level term life insurance policy—this is why some people consider buying them.
Should I buy decreasing term life insurance?
There are three scenarios when it might make sense to purchase a decreasing term life insurance policy.
It might be wiser to consider