Decreasing term life insurance is a policy with a set premium and a death benefit that gets smaller over the coverage period. Decreasing term life insurance is often used to protect a specific debt — coverage lasts as long as the loan and the benefit decreases as you pay it off — but a level term life insurance policy has more flexibility and is usually a better value for your money. The death benefit and premium of level term life insurance never change as long as you make policy payments on time.
How does decreasing term life insurance work?
Decreasing term coverage usually lasts 5 to 30 years. When the death benefit decreases and the amount it decreases by is set when you buy your policy. For example, decreases might correspond with a loan payment schedule, or your provider could set the death benefit to decrease by $100,000 every five years.
When should you buy a decreasing term policy?
You might buy a decreasing term policy because you’ve saved enough to support your family after you pass away and only need your benefit to pay the balance of a loan in the event of your death. This way, you never pay for more life insurance than you need.
Most people encounter decreasing term life insurance as mortgage protection insurance (MPI). MPI is a decreasing term life insurance policy that you purchase through your bank and may pay as part of your mortgage. In the event of your death, the life insurance company pays the death benefit directly to the mortgage company.
Decreasing life insurance vs. level term
Here’s how level term and decreasing term life insurance compare:
| Level term | Decreasing term | |
|---|---|---|
| Duration | 5 to 40 years | 5 to 30 years |
| Guaranteed death benefit | Yes | Yes, but benefit decreases over time |
| Premiums | Guaranteed to remain level | Guaranteed to remain level, even as benefit decreases |
| Best for | Getting coverage for several years and for more than just debt | Covering one large debt or loan |
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Alternatives to decreasing term life insurance
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. Still, most people can address this same financial need with level term life insurance or the life insurance laddering strategy.
Term life insurance: A traditional term life policy can be used to cover all of your debts and give your family financial support for everyday expenses and savings. The death benefit never changes, even if you pay off your debts.
The ladder strategy: This is a savings method in which you buy multiple level term policies of varying lengths and coverage amounts. The laddered policies expire as your financial obligations decrease, so you're only ever paying for the coverage you need.
Is decreasing term life insurance worth it?
For the most part, decreasing term life insurance isn’t worth the cost. Not only are you paying the same amount throughout the term for a shrinking benefit, but it often doesn’t account for your changing coverage needs.
If you’re worried that your need for life insurance will decrease over time, you can lower the amount of coverage you have with a traditional life insurance policy or use the ladder strategy. This will also lower your premiums — whereas in a decreasing life policy you’d continue to pay the same premiums for a lower amount of coverage.
Frequently asked questions
Why would you get decreasing term life insurance?
You might get a decreasing term policy if you only need to cover a specific loan, like a mortgage.
What are the advantages of decreasing term insurance?
You can customize a decreasing term policy to one loan, which is a benefit if you don't need your life insurance to protect any other financial obligations.
What happens at the end of a decreasing term insurance policy?
If you outlive your decreasing term policy, the insurance simply expires. There is no payout, you stop paying premiums, and you no longer have life insurance coverage.
