Decreasing Term Life Insurance

Is decreasing term life insurance the right policy option for you and your family? That depends on how you plan to protect your family after your death. Learn more about your options so you can make an informed choice about the type of life insurance you want to buy.
By Matthew T
Updated Sep 5, 2022
decreasing term life insurance
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In general, term life insurance policies provide benefits over a predetermined amount of time. If the policyholder dies during the covered term, then that person's beneficiaries can cash in the insurance to pay for expenses like funerals, burial plots, housing, and education. Decreasing term life insurance takes a similar approach to protect families, but it has some noteworthy differences that make it more attractive to certain people.

Is decreasing term life insurance the right policy option for you and your family? That depends on how you plan to protect your family after your death. Learn more about your options so you can make an informed choice about the type of life insurance you want to buy.

What Is Decreasing Term Life Insurance?

Decreasing term life insurance has a fixed annual cost. Policies usually cost less than traditional term life insurance. Companies can offer policies at lower prices without adjusting rates over time because the benefits decrease a little each year.

When you buy a decreasing term policy, you can choose how long you want it to last. Most insurance providers offer policies with terms between one and 30 years.

During the first year of a 30-year policy, decreasing term life insurance might pay out $100,000. During the second year, the payout might fall to $98,000. After ten years, the policy might pay about $85,000. The value continues to drop until it reaches the final year when it has a $0 cash value.

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Who Is Decreasing Term Life Insurance For?

Decreasing term life insurance often works well for income-earners who want to make sure their families have enough money to live well after they pass. A 30-year-old woman who earns most of her family's money, for example, could get a policy that helps pay for her children's college tuition, burial expenses, and any money remaining on a mortgage.

Many people plan their decreasing term life insurance policies to match their mortgage's amortization tables. As you repay the mortgage, your life insurance policy doesn't need to give your family as much money to eliminate the debt. As the remaining balance shrinks, your insurance policy's value will decrease at the same level.

If you want to make sure that your family has more money, you should talk to your insurance company about choosing a decreasing term life insurance policy with a higher value. The price of your policy will increase, but you secure more money for your beneficiaries. Also, you can expect the fixed payments to become more affordable over time. After 15 years of inflation and pay raises, your monthly or annual insurance payment should feel more reasonable.

A person signing up for Life Insurance.

Is A Decreasing Term Policy Worth It?

Buying a decreasing term life insurance policy has some apparent benefits. Since the policy costs less than traditional term life insurance, you can save money while still protecting your family from financial stress. Your monthly or annual payments will never increase, so you can add the same amount to your budget until the policy reaches the end of its term.

Like all types of term life insurance, though, no one gets paid when you outlive the policy. Ideally, you will live much longer than the policy's term. You want the insurance to cover the costs of your unexpected death. No one wants to leave their loved ones behind without enough money to continue living well.

Since the value of your decreasing term life insurance policy will eventually reach $0, you could spend quite a bit of money without ever getting a financial reward in return. You always get the peace of mind of having a life insurance policy. Still, some people feel that they wasted money when they reach the end of the policy's term.

If you want to guarantee that you get something in return for your payments, consider buying whole life insurance. Whole life insurance policies cost more than term life insurance. Compared to decreasing term life insurance, whole life policies can seem very expensive. Spending more money, however, gives you some advantages that you won't get from term life insurance.

You might prefer whole life insurance if you want to:

  • See your policy's cash value grow at a predictable rate.

  • Borrow money against the value of your policy.

  • Guarantee that your family gets paid after your death.

  • Avoid taxes by putting money into your policy and watching its value increase.

  • Get paid annual dividends or leave dividends in your account to earn interest or lower your premium.

Despite the benefits of choosing whole life insurance, many people opt for decreasing term life insurance because the policies cost so much less. A whole life policy will become increasingly expensive as you get older. A term life policy's premium will never change. A lot of people find affordability and predictability comforting.

Read more: Doing the Math on Whole vs. Term Life.

A man meeting with his Life Insurance Agent.

What Is the Difference Between Level and Decreasing Term Insurance?

If you decide that whole life insurance costs too much, then you will want to focus on term life insurance. Many insurance companies will let you choose between level and decreasing term policies.

Level Term Insurance

Like decreasing term insurance, a level term insurance policy will cost the same amount every year. The price will never go up, so you will know exactly how much money to set aside for the policy.

With level term insurance, your benefits also stay the same throughout the policy's life. Whether your beneficiaries cash in the policy after one year or 30 years, the insurance company will pay them the same amount.

Since level term insurance maintains the same amount of coverage from year to year, you can expect higher premiums.

Decreasing Term Insurance

Decreasing term insurance might pay a smaller amount over time, but you get a lower premium that makes it more affordable. You still get the financial protection that your family needs to keep its lifestyle after your life ends, but you don't have to spend as much on your annual premiums.

If you choose decreasing term life insurance, you should think carefully about how much money your beneficiaries will need from year to year. You may decide how much coverage to buy by looking at your mortgage's amortization table. As long as your decreasing term life insurance payments cover the remaining debt on your mortgage, your family can pay off the loan.

You might want to give them more than such a basic level of financial protection, though. If you can afford to spend a little more on your insurance policy premiums, it could make sense to get more coverage.

Which Option Is Right for You?

Only you can decide whether decreasing or level term life insurance is the right choice for your family. Both have their advantages. Some people choose to reduce their term life insurance because they want to save money now. You could potentially give your family more financial protection by investing the money you save.

Then again, some people don't want to take any risks that their families won't have the coverage that they need. Peace of mind is worth a lot. If you know that you're willing to spend more money on premiums to keep your benefits the same, explore level term life insurance policies. They might fit your needs better.

Converting Term Life Insurance Into Whole Life Insurance

You never know how your financial security will change over the years. You could get a promotion that comes with a significant raise. Similarly, your finances could change as your children get older, you move to a different city, or members of your family get jobs.

At some point, you could decide that you prefer whole life insurance over your decreasing term insurance policy.

Depending on your policy, your insurance company might let you convert your term life insurance into a whole life plan. If your term life policy includes a conversion rider, then you can convert to a whole life policy without paying any fees. Of course, your premiums will go up because whole life insurance offers more benefits.

Most term life policies have some restrictions on when you can convert to a whole life plan. For example, your insurance company might not let you convert until you've had the term life policy for at least two years. The policy may also have restrictions that prevent you from converting to whole life insurance after a certain age.

How to Buy a Decreasing Term Life Policy From an Insurance Company

Buying a decreasing term life policy doesn't take a lot of effort. A little preparation, however, will go a long way toward helping you get the best policy at the lowest price possible. You don't even have to contact insurance companies individually. Many services will collect quotes from multiple insurance providers to help you save money on a policy that's right for you and your family.

Decide How Much Coverage You Want

Do some research into your personal debt, expected expenses, and expected income to determine how much money you want to leave your beneficiaries. If you just purchased a home and you still owe $300,000 on the mortgage, you should consider getting a policy with a $300,000 death benefit. With whole life or level term life insurance policy, this might cost quite a bit. Decreasing term life insurance spreads the cost out over many years, though, so you can find affordable options.

Many people want to leave their families more than the money they will need to buy their homes. Life comes with a lot of expenses. If you weren't there to contribute, could your family afford to pay for a sudden health crisis, tuition to a great college, or new vehicles?

Also, consider that inflation will always push prices up. Your mortgage will become more affordable as you repay the debt. Other than changes in property tax, that's a relatively fixed expense. College tuition and healthcare, however, get more expensive every year. You have no idea how much it might cost to send your youngest child to school.

Compare Your Term Life Insurance Policy Options

Once you decide how much coverage you want from your decreasing term life insurance, you can start comparing policy options and premiums. You will get the best deal by requesting quotes from as many insurance companies as possible. Just because one insurance provider charges more than you expected doesn't mean that another company won't have a significantly lower price.

Read more: How to Pick a Term Life Insurance Policy.

Adjust Your Policy Requirement to Get an Affordable Option

Don't forget that you can always adjust your policy features until you accept an offer. If you don't want to pay the premiums for a $400,000 decreasing term life insurance policy, lower the benefits to see how that affects the price. Reducing your benefit to $300,000 could shave quite a bit off of your annual premium.

You can also play with the length of your policy's term. A 30-year term will usually have higher premiums because you will be older when the coverage ends. Insurance companies pay close attention to statistics, and they factor age into premiums. If you're only 20 years old, then a 30-year policy might have an affordable price. If you're 50 years old, you can expect to pay more because the insurance company knows there is a higher chance that you will die by the time you reach 80.

Shortening the term will lower your premium because it reduces the risk for your insurance company. Most people live beyond 65 years, so you can often get a better deal on a 15-year policy when you're 50 years old. While the 30-year policy probably has a high price, the 15-year policy could fit your budget easily.

Finalize Your Decision by Accepting a Policy

Eventually, you should find a policy that meets your coverage needs and doesn't cost more than you can afford. If you adjust your policy, always request new quotes from insurance companies. The smallest change could make a big difference. You won't know until you ask.