Decreasing Term Life Insurance: What It Is & How It Works

What is decreasing term life insurance and how does it work? This guide answers the most frequently asked questions about this policy type.
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Written by Brian Greenberg

Last updated: July 19th, 2022

Reviewed by Grant Desselle

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 About Decreasing Term Insurance

Why would you want decreasing insurance?

A decreasing insurance policy is beneficial for those who want coverage for a fixed period of time. It can also be less expensive than level term life insurance policies and allow you to purchase more coverage.

What happens at the end of a decreasing life insurance policy?

At the end of a decreasing life insurance policy, the death benefit is paid out to your beneficiary.  If you have a policy with a term of 20 years, the death benefit will be paid out if you die within the 20-year term.

What is one important element of decreasing term insurance?

One important element of a decreasing term life insurance policy is that the death benefit decreases over time. This can provide protection for a specific period of time, such as when you have a mortgage.

Can I cancel my decreasing term life insurance policy?

Yes, you can cancel your decreasing term life insurance policy at any time. However, if you do so after the policy has been in force for less than two years, you may be subject to a cancellation fee. Discuss cancellation options with your insurance provider before signing any agreement.

To learn more about decreasing term life insurance policies or to get a quote, visit the Insurist website today. We can help you find the right policy for your needs and budget.

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