Decreasing term insurance

For most people, a level term life insurance policy is the best life insurance option. A level term policy is the most common form of term life insurance and provides a set death benefit if you die while the policy is active, for which you pay a premium that stays the same for the life of the policy.

Decreasing term life insurance also offers a set premium, but the death benefit decreases over the life of the policy. You may find a decreasing term policy useful if you only need your life insurance policy to cover your debts, but a traditional level term policy likely offers more flexibility and a better value for your money.

How does decreasing term life insurance work?

Decreasing term life insurance is a type of term life insurance that offers a death benefit that shrinks over the duration of the policy (typically five to 30 years). You pay the same amount each month or year, but your death benefit grows smaller. How often your benefit decreases and the amount it decreases 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?

Like credit life insurance, a decreasing term policy is often attached to a large personal or business loan. 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 your 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.

Note that MPI differs from private mortgage insurance (PMI), which your lender may require you to buy if your down payment is less than 20%. PMI protects your lender if you default on your loan, but doesn’t offer coverage if you pass away before paying off the loan.

Level term insurance vs. decreasing term insurance

Here’s how level term and decreasing term life insurance compare:

Alternatives to decreasing term life insurance

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. 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 insurance policy is better suited to cover changing financial needs. The level death benefit in traditional term life insurance can be large enough to cover your mortgage payments and support a spouse or children. You may be able to decrease the face value of your level term policy after you pay down a large portion of your loan. With a level term policy, if you decide to reduce the face value of your policy, your premiums would decrease, too.

The ladder strategy

If you’re concerned that you will ultimately be left paying for more coverage than you need as you pay off your debts, you could employ the life insurance ladder strategy, which involves buying multiple level term policies of varying lengths and coverage amounts that expire as your financial obligations decrease. Laddering policies will also save you money on premiums by ensuring that you only pay for the coverage you need and only when you need it.

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 decreasing amount of coverage, 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. A traditional term policy will likely be more affordable in the long-run than a decreasing term life policy.