When you’re in the market for a suitable life insurance policy, there are a lot of options to consider. One such policy is the little-known decreasing term life insurance. What is it, and how does it work?
This post shares everything you may want to know about this life plan including how it works and reasons for taking it out.
Ready? Let’s dive straight in!
What is decreasing term life insurance?
Decreasing term life insurance is a type of policy that provides a lump sum payout if you pass away within the contact period. But as its name implies, its benefits reduce as you approach the end of the contract. That’s to mean if you depart at the beginning of the policy, your dependents receive more financial support than if you were to pass away nearer to the end.
Decreasing term life insurance comes with lower notably lower premiums compared to most other life plans. Most importantly, it gives you peace of mind knowing that your dependents will have adequate support to clear any outstanding obligations upon your demise.
What is decreasing term life insurance best for?
Most users take out decreasing term life insurance to cover a specific financial obligation, mostly a mortgage. The amount of benefit decreases in line with the outstanding mortgage liability. The idea is to ensure that your dependents have enough support to pay off the remaining mortgage should you pass away within the contract period.
Recently, a lot of mortgage lenders have been insisting on users taking out a life insurance policy before they approve applications. This is because the policy serves as collateral or a form of guarantee that they will get their money back regardless of what happens to the applicant.
Please note that decreasing term life insurance may not be as helpful if you have an interest-only mortgage. Such mortgages require you to repay the full amount at the end of the contract which makes this policy unsuitable for such cases.
How does decreasing term life insurance work?
The first thing to note is that insurers usually offer coverage for a set period called ‘term’ (typically 5 to 30 years). As you pay your regular premiums, the policy amount reduces such that by the end of the term, the amount shall have fallen to zero.
Ideally, the policy term lasts the same time as the mortgage. So, if you have a 25-year mortgage, you’ll need to take out insurance for the same period such that your dependents will always have enough to afford the outstanding mortgage amount upon your demise. Also, you must ensure that the benefits are enough to clear the outstanding mortgage.
So how does the insurer determine the rates?
Unluckily, there’s no standard formula that insurers use to calculate how the benefits payable decrease periodically. However, like most life insurance products, factors such as health, age, and the amount of cover needed come into play here. Be sure to gather all this information before signing the contract.
Should you purchase decreasing term life insurance?
If you’re still sceptical about taking out a decreasing term life insurance policy, you might change your mind after discovering its benefits as follows:
The decreasing term policy is a lot more affordable than the level term life insurance. The reason for this is the benefits payable usually decreases over time. This means you get the same amount of coverage for lower premiums.
Cover debts and other financial obligations
Having long-term obligations like mortgage payments or car loans can deny you sleep if you don’t have a sound plan in place. Fortunately, decreasing term life insurance helps to take care of such financial obligations affordably and flexibly. That way, you can rest knowing your loved ones don’t have any financial burdens to deal with should you pass away during the contract period.
To this end, we hope that this short guide has enlightened you on decreasing term life insurance and the benefits of taking out the policy. In a nutshell, the cover lasts for between 5 and 30 years and is best suited for financial obligations that decrease over time. The benefits shrink as you approach the end of the contract which means you may never receive them if you outlive the policy.
Did we miss anything or do you have a question for us? We’d love to hear your feedback in the comments below.