Quick answer
Decreasing term life insurance is a term life policy whose death benefit decreases on a fixed schedule over the life of the policy, typically to match a declining obligation like a mortgage payoff. Premiums are usually level, not decreasing, so the cost per dollar of coverage rises each year. Decreasing term is much less common in the U.S. retail market than level term because the premium savings are typically small (5 to 15 percent) and the buyer is exposed to a coverage shortfall if the underlying obligation is paid down slower than the schedule assumes. Most retail buyers are better served by level term, which keeps the death benefit constant for the full term length and provides flexibility if needs change.
Most people are familiar with the concept of life insurance, but what about decreasing term life insurance? Decreasing term life is a specific type of life insurance policy that provides protection for a fixed period of time. Unlike traditional whole life insurance or universal life insurance, the death benefit decreases down the line as premiums are paid.
Decreasing term plans can be a good choice for those who want to purchase more coverage than they could afford with a permanent policy. Keep reading to learn more about how it works and whether it’s right for you.
How Decreasing Term Life Insurance Works
Which policy component decreases in decreasing term insurance? In this regard, the death benefit decreases over time while the premium remains level. The death benefit may decrease annually or monthly, depending on the policy, as it is designed to provide protection for a set term, such as 10 or 20 years.
For example, if you purchase a policy with a death benefit of $500,000 and a premium of $100 per month, the death benefit would decrease by $5,000 each year. At the end of the 10-year term, the death benefit would be $100,000.
Most policies also have a conversion option, which allows you to convert the decreasing term policy to a permanent policy without having to go through underwriting again. This can be a helpful option if your health status changes or you no longer need coverage.
What Are the Benefits of Decreasing Term Life Insurance?
There are several benefits to consider when looking at decreasing term life insurance policies:
More coverage than you could afford with a permanent policy
Because the death benefit decreases over time, decreasing term life insurance policies are generally less expensive than permanent life insurance policies. This can allow you to purchase more coverage.
Protection when you need it most
The death benefit on a decreasing term life insurance policy is designed to go down as your financial obligations decrease. For example, if you have a mortgage that you plan to pay off over 20 years, a decreasing term life insurance policy can provide protection for the length of the mortgage.
Convertibility
Some decreasing term life insurance policies offer the option to convert to a permanent life insurance policy without having to prove insurability.
Drawbacks of Decreasing Term Life Insurance
Decreasing term insurance is not without its disadvantages, which are good for you to know before you dive in and sign. These include:
- Limited coverage: As the death benefit decreases over time, the amount of coverage available becomes more limited.
- No cash value: Unlike permanent life insurance policies, decreasing term life insurance policies do not have a cash value component.
- May not be renewable: Many decreasing term life insurance policies are not renewable after the term expires, so you will need to purchase a new policy if you want continued coverage.
Most Important Terms To Watch Out For
When shopping for a decreasing term life insurance policy, it’s important to understand the following terms:
- Death Benefit: The death benefit is the amount of money that will be paid to your beneficiary if you die while the policy is in force.
- Premium: The premium is the amount you will pay for your policy. Premiums are typically paid monthly, but can also be paid annually or semi-annually.
- Term: The term is the length of time that the policy will be in force. Most decreasing term life insurance policies have terms of 10, 15, 20, or 30 years.
- Conversion option: Some decreasing term life insurance policies offer a conversion option, which allows you to convert the policy to a permanent life insurance policy without having to go through underwriting again.
- Renewability: Some decreasing term life insurance policies are renewable, which means you can continue the coverage after the term expires. However, most policies are not, and you will need to purchase a new one if you want continued coverage.
Frequently Asked Questions
What is decreasing term life insurance?
Decreasing term life insurance is a term life policy whose death benefit drops on a fixed schedule over the life of the policy. The schedule is usually matched to a declining financial obligation like a mortgage amortization. Premiums are typically level for the full term length, not decreasing, so the per-dollar-of-coverage cost rises each year as the death benefit drops. Decreasing term is most commonly sold as "mortgage protection insurance" or "mortgage life insurance" through lender-affiliated agencies. Few major retail carriers (Banner, Protective, Pacific Life) offer decreasing term as a stand-alone retail product.
How does decreasing term life insurance work?
You select a starting death benefit and term length (typically 15, 20, 25, or 30 years matched to a mortgage). The death benefit decreases each year on a pre-set schedule that approximates the amortization of a fixed-rate mortgage of equal length. Sample: $300,000 30-year decreasing term might start at $300,000 in year 1, drop to $270,000 by year 5, $230,000 by year 10, $170,000 by year 15, $90,000 by year 20, and $25,000 by year 25 before reaching zero at the end of year 30. The premium stays flat at the rate calculated for the average expected death benefit across the entire term.
How much does decreasing term life insurance cost?
A healthy 35-year-old non-smoker can buy a $300,000 30-year decreasing term policy for roughly $25 to $35 a month, which is typically 10 to 20 percent cheaper than a $300,000 30-year level term policy from the same carrier ($30 to $42 a month). The savings are smaller than buyers expect because the level premium is calculated against the average death benefit over the full term (typically about 50 to 55 percent of the starting face amount), not the starting face amount. Most retail buyers find the savings too small to justify the loss of flexibility versus level term.
Is decreasing term life insurance worth it?
Rarely, for the typical retail buyer. The premium savings versus level term (typically 5 to 15 percent) are small relative to the loss of coverage flexibility. If your mortgage gets paid off slower than the schedule (extra refinance, missed extra payments), you have a coverage shortfall. If you take on a new obligation during the term (second mortgage, business loan, second child), the decreasing death benefit may be inadequate. Most financial planners recommend level term as the default choice with the same term length matched to the longest obligation, because the level death benefit provides a buffer for unexpected new obligations and the premium difference is small.
What is the difference between decreasing term and level term?
Level term has a constant death benefit for the full term length and a constant premium. Decreasing term has a death benefit that drops each year on a fixed schedule and a constant premium. Level term is more expensive (typically 5 to 15 percent more) but provides constant coverage. Decreasing term is cheaper but matches a specific declining obligation. Level term is the better default for primary income replacement (mortgage + children + business). Decreasing term can make sense as a supplement specifically for a mortgage if the buyer wants to minimize cost and the mortgage is the only obligation.
What is mortgage protection insurance?
Mortgage protection insurance (sometimes called mortgage life insurance) is decreasing term life insurance sold by lender-affiliated agencies as a way to pay off the mortgage balance if the borrower dies during the loan term. The death benefit is paid directly to the mortgage lender, not to the borrower's family. Most financial planners discourage mortgage protection insurance because: (1) the death benefit is paid to the lender rather than the family who can decide whether to pay off the mortgage or invest the proceeds, (2) the buyer has no flexibility in beneficiary designation, and (3) retail level term life insurance for the same coverage is usually cheaper and more flexible.
Which carriers offer decreasing term life insurance?
Decreasing term is less commonly offered as a retail product than level term. Carriers with notable decreasing-term products: Banner Life, Protective, and Pacific Life offer decreasing term in some states, typically marketed for mortgage protection. AAA Life offers a decreasing-term product. Several small specialty carriers (typically lender-affiliated) market decreasing term aggressively but at premium rates that are sometimes 30 to 60 percent above retail level term. Always compare a decreasing-term quote against a level-term quote at the same face amount before deciding.
Can I convert decreasing term life insurance to permanent insurance?
Some decreasing term products offer a limited conversion option, but the conversion provisions are typically less generous than the conversion options on level term policies. Banner Life and Protective both offer conversion on their decreasing-term products but with shorter conversion windows than level term. AAA Life decreasing term typically does not include a conversion option. Always read the conversion provisions before buying, especially if you may want to convert to permanent insurance later.
Does decreasing term life insurance have cash value?
No. Like all term life insurance, decreasing term is pure protection with no cash value, no surrender value, and no investment component. The entire premium goes toward the death benefit and carrier expenses. If you stop paying the premium, the policy lapses after the grace period and there is no refund. Permanent policies (whole, universal, indexed universal, variable universal) accumulate cash value but cost significantly more per dollar of death benefit.
Should I buy decreasing term or level term for my mortgage?
In almost every case, level term is the better choice. The premium difference is small (5 to 15 percent) and level term provides important flexibility: if you take on a second mortgage or refinance, the level death benefit still covers the larger obligation. If you pay off the mortgage early through extra payments or a refinance, the level term still provides death-benefit protection for other obligations like college funding or income replacement. The only scenario where decreasing term makes sense is when the mortgage is the only obligation and the buyer is very confident the mortgage will be paid off on schedule.
