What is declining life insurance?

When shopping for life insurance, you may have come across the phrase “decreasing life insurance.” But what is it?

Well, that’s a bit of a misnomer, because it’s not term which decreases — it is the coverage. In short, you buy a life insurance policy with a certain sum assured and during the life of the policy, that sum assured decreases.

Why would you want that? And is such a policy a good fit for you? Here’s what you should know about term life insurance and whether it̵

Reduce life insurance compared to traditional life insurance

What is the difference between step-down life insurance and traditional life insurance (also called “term life insurance”)? Instead, let’s start with what they have in common.

Both types of life insurance offer coverage for a specified period of time (the “Term”). In exchange for monthly premiums, your insurer will offer your designated beneficiaries a death benefit equal to the coverage you have purchased.

The idea is that if you were to die before the end of term, your loved ones would receive a lump sum of money to help them pay for your final expenses (such as funeral or burial costs), plus ongoing costs such as rent or a mortgage, groceries and bills, teaching and more.

With decreasing term life insurance, the amount of policy you buy will decrease over the term, even though the premiums you pay will remain the same. Your term can be anywhere from 5 to 30 years, and your coverage can decrease by a certain amount (say $100,000) or a fixed percentage (say 5%) each year during the life of the policy.

Again, you will pay the same monthly premium early in your term (when the policy is worth more) as you will later in the term (when the policy is worth less).

Traditional life insurance is a little simpler. In short, you buy a certain amount of insurance and usually pay the same premium throughout your policy term.

Let’s say you’re a 25-year-old woman in excellent health. You can buy a 25-year term life insurance policy worth $500,000 from Haven Life for $19.15/month. If you die after three years, your policy is worth $500,000. If you die within 24 years, your policy is still worth $500,000.

The cost of reducing term life insurance compared to traditional life insurance

While we’re on the subject, let’s break it down further. Decreasing life insurance policies often have similar or slightly lower monthly premiums than a level life insurance policy.

But again, you have to look at what you’re getting for your money – at the end of a declining life insurance policy, you’re paying the same amount of money for much less coverage than you were at the beginning.

With a level life insurance policy, you pay the same premiums for the life of the policy. In fact, since many people buy life insurance for the years when they are young and healthy, you can lock in a low price that for many people is less than you pay every month for coffee or streaming services.

All in exchange for substantial coverage that your loved ones can use to pay for literally anything they need or want in the event that you die during your policy term. Here are some examples of what someone in excellent health might pay per month for Haven Term:

What does declining life insurance cover

In general, the idea behind life insurance is that if you have people who depend on you to pay for things (housing, food, bills), a policy helps ensure that those people will have money to pay for those things in the event that you are not around.

Diminishing life insurance works that way. If you die during the term, your nominated beneficiary (usually your spouse) will receive a lump sum which they can use however they see fit.

For most people, however, decreasing term life insurance is a form of mortgage protection insurance. The idea is that if you were to die shortly after taking out a mortgage, your loved ones would still owe quite a bit of money on your house. But if you die later in your mortgage, your family would need less money to pay it off. This is why the sum assured (ie the death benefit) decreases during the term of the policy.

But consider this: Even if you’re paying off your mortgage over time, you probably have other expenses to consider. In fact, due to both inflation (even in “normal” times) and increased costs of living, you may actually have More costs towards the end of your insurance even less.

That’s the idea behind traditional level life insurance policies. A good rule of thumb is to buy a cover amount worth 5 to 10 times your annual salary. This is so that your loved ones can continue to pay off that mortgage, while still having money left over for day-to-day expenses, end-of-life expenses and other related costs that come with everyday life.

When is it the right choice to lower life insurance?

Although traditional life insurance is a smart and affordable choice for many people, there are some times when it may make sense to lower life insurance policies. Here are those cases:

If you have a mortgage (and few other expenses)

Owning a home is the American dream. To finance it, most people take out a mortgage and pay it off over time – usually from 15 to 30 years. Each year you will owe a little less. A decreasing term life insurance policy can be used as mortgage protection insurance, with a coverage amount that decreases over time alongside your mortgage debt.

The advantage of this is that you only pay for the coverage you need. The downside is that, if you have any other expenses, your insurance won’t cover them, potentially leaving your loved ones to pay for them in your absence.

If you have a small business loan (and few other expenses)

Everything we have written about a mortgage above applies to a small business loan.

Again, you will owe more at the beginning of the loan than you owe at the end. Shorter-term life insurance can provide the coverage you need for the loan in case you don’t live to pay it off. Again, the pro is that you only pay for the coverage you need. Again, the downside is that if you have any extra expenses, they may not be covered by the policy.

If you have other types of debt (and few other expenses)

If you have student loans, personal loans or other types of debt, and if you have few other regular demands on your bank account, shorter term life insurance can be an affordable way to get coverage if your debt outlives you.

What is best for you and your loved ones

For many people, a shorter term life insurance policy will not provide the coverage your family needs if something happens to you, and you are no longer around to pay for life’s necessities.

Traditional level life insurance is an affordable option. You pay the same monthly premium throughout your policy term and the sum insured remains the same. With some careful planning (including using a free online life insurance calculator), you can determine how much coverage you need and how long you’ll need it.

Whether you’re taking out a mortgage, starting a family (or planning to) or have other long-term expenses you want covered in case the worst happens, long-term insurance can provide financial protection for your loved ones. Start your journey to peace of mind with a free quote online today.