There’s a life insurance option out there to meet almost everyone’s needs, which means that you have many choices when you’re shopping. One policy that you might come across is called decreasing term life insurance.
Your coverage amount decreases over time with decreasing term life insurance, meaning that your premium is lower than many other types of policies. These lower rates might sound like a good thing, but be careful – this type of policy can leave you unprotected when you need it. Here’s what to know.

How does decreasing term life insurance work?

Decreasing term is a type of term life insurance, which provides affordable and flexible coverage for a set period. With term insurance, if you die while the policy is active, your family receives a cash payout from your insurance company to use however they like.

Most term life insurance policies are level term, which means that the premiums and death benefit stay the same from beginning to end. However, a decreasing term life policy has a payout that lessens over time. Since the payout declines, decreasing term insurance often has lower rates than other types of term life insurance.

When you buy a policy, you choose a coverage level and length. Term life plans typically come in lengths of 10 to 30 years. Each year, your decreasing term coverage will drop by a certain amount or percentage of the original payout. For example:

• If you purchase a 20-year plan with a $300,000 payout and a reduction rate of 5%, your payout would decrease by $15,000, or 5% of $300,000, each year.
• Your family would receive the full $300,000 if you die during the first year of coverage.
• Each year after that, the payout would decrease by 5%. For example, your payout would be $225,000 after five years.
• At the end of the 20-year term, your payout would reach $0 and the policy would end.

When does it make sense to buy a decreasing term policy?

Decreasing term life insurance is often used to cover a specific debt, like a mortgage. For example, if you have a 30-year mortgage, you can buy a decreasing term life insurance policy to match the coverage amount and length of the mortgage. Each year, the payout and mortgage amount would decrease together.

Decreasing term life insurance is similar to mortgage protection or credit life insurance, with a few key differences. Mortgage protection insurance is meant to protect your lender financially if you can’t pay, so the payout goes directly to your bank if you die. With decreasing term life insurance, however, you choose your beneficiary and the payout goes to them instead of a lender.

Is decreasing term insurance worth it?

While lower rates might seem attractive, decreasing term life insurance is not the best choice for most people. Here’s why:

• Term life is already affordable. Term life insurance is much more affordable than most people think. About 43% ofmillennials and 51% of Gen Z overestimate the cost of life insuranceby five times the actual amount. If you are a 30-year-old healthy man,life insurance policy quotes start at about $13 per month and provide you with up to $250,000 in coverage. In most cases, saving a few dollars a month on your rate just isn’t worth the tradeoff of potentially leaving your family uncovered.
• Many people already don’t have enough coverage. According to one industry study, nearly 50% of all households with insurance are underinsured. A policy like decreasing term, where the payout actually declines over time, can mean an even bigger gap between your coverage and your needs.
• Life insurance should cover both your current and future needs. You might just be thinking about covering your mortgage now, but it’s important to consider what might be coming down the road. Having a baby or sending a child off to college in the years ahead could mean that your family needs more to rely on financially. When you plan your life insurance purchase, make sure that you’re accounting for any expenses you might have down the road, so that your family is fully protected. Think about people who rely on you financially, mortgages, student loans or other debts you are paying off, funeral and end of life medical costs, your children’s college tuitions, and your ideal financial cushion. Our life insurance calculator can help you find the right amount of insurance for you.

What are some alternatives to decreasing term life insurance?

Now that you know a little more about decreasing term life insurance, you might be wondering what your other life insurance options are. There are a couple of great alternatives to decreasing term life insurance, including:

• Level term life insurance is an affordable and flexible option and an excellent fit for most families. With level term life insurance, premiums and coverage stay the same throughout the term, so it’s easy to plan around. Fidelity Life offers a variety of term life plans with coverage lengths of 10 to 30 years and coverage amounts of $50,000 to $2 million.
• Permanent life insurance. While term life insurance is usually your best bet, some families need the lifelong coverage that permanent life insurance provides. This type of life insurance never expires, so it can help you ensure that a family member with disabilities or other lifelong financial needs is covered. This type of life insurance also builds cash value over time, which you can access as needed throughout the life of the policy.

Pros & cons of decreasing term insurance policies

The main benefit of decreasing term is simply the lower-cost premiums for this type of coverage when comparing against similar term life insurance policies. Most people or businesses that use decreasing term policies are using it to cover the cost of repaying debt, where the amount of debt remaining is decreasing with on-time payments, so a decreasing term policy’s value can be reduced to cover the remaining debt.

This type of policy is most often used for mortgages, but can cover business debts as well, so that business partners can use an insurance coverage that will repay debt if one of the partners dies.

If you understand the purpose of and reduced payout from a decreasing term policy, it can help provide security in the face of a debt. But if you are comparing premiums for a traditional term policy with a decreasing term policy and are looking for coverage for lost income, you may risk focusing on premium costs without considering the way that a decreasing term policy reduces death benefit payout over the life of the policy.

Fidelity Life is here to help you find the right decreasing term policy

Still have questions? We’re here to help. Get your quote online today or call one of our agents at (866) 912-7775.

At Fidelity Life, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed, and updated regularly to ensure the information is as relevant as possible.