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Understanding the many types of life insurance.
You understand term life insurance vs. whole life insurance, but now you’re hearing that the world of life insurance goes even deeper.
Should you be considering all of the types of life insurance? Probably not — level term life insurance is the best type of life insurance for most people. But knowledge never hurt anyone, so it’s worth your time to understand all the types of life insurance, including decreasing term.
Read on to find out:
Decreasing term life insurance is a type of term life insurance that offers a death benefit that shrinks over the duration of the policy with a premium that remains the same for the duration of the policy. That’s right: you pay the same amount each month (or year, depending on how your policy is set up) but your death benefit lowers each month (or year, depending on how your policy is set up).
This is in contrast to level term life insurance, the most popular form of term life in which the premium rate is guaranteed to not rise for the entire term of the policy.
Why would anyone choose a decreasing term policy? Great question. Theoretically, someone could buy a decreasing term policy because they only need a benefit that will pay the balance of a loan they have. In exchange for (possibly) lower premiums, they buy a policy that will have a decreasing benefit. But there are better ways to keep from being over insured (see below).
The main thing to know about decreasing term life insurance is that most insurance companies don’t even offer it, so it probably doesn't need to be a part of your decision.
Here’s how level term and decreasing term life insurance compare:
|Level Term Overview||Decreasing Term Overview|
|Duration||1-30 years||1-30 years|
|Guaranteed Death Benefit||Yes||Yes, but death benefit decreases over time, per terms of policy|
|Guaranteed Cash Value||No||No|
|How Cash Grows (or Shrinks)||-||-|
|Premiums||Guaranteed to remain level||Guaranteed to remain level, even as death benefit decreases|
|Notes||Best option if you'll need coverage for a number of years||Most often purchased as mortgage insurance through a bank|
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Decreasing term life insurance is most often encountered as “mortgage insurance” when you take out a mortgage. At the bank, you may be offered a type of decreasing term life insurance sometimes called mortgage protection insurance (MPI). MPI is a decreasing term life insurance policy that you purchase through the bank, may pay as part of your mortgage, and (this is key), in the even of your death, pays the death benefit directly to the mortgage company.
This differs from the private mortgage insurance (PMI), which is an insurance product that your lender may require you to buy if you put less than 20% down. PMI protects your lender if you foreclose on the house, and is not a life insurance product.
Decreasing term life insurance policies rarely make sense, especially since level term life insurance is so affordable. But if your primary reason to purchase life insurance is to ensure that one debt is covered in case you die, a decreasing term policy could be an option — that is, if you can find a carrier to write you one. There are two better options if you want to cover one decreasing debt:
One better option would to buy a level term life policy and decrease the face value of that policy as you pay down the balance of the corresponding loan. (Bonus: With a level term policy, if you decide to reduce the face value of your policy, your premiums would decrease, too.)
The second strategy you could employ is the life insurance ladder strategy, which involves stacking a few different level term policies that expire as you pay down your debts. (Bonus: stacking policies can mean you pay lower premiums over the lifetime of the policies than if you just had one level premium).
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