BREAKING DOWN ‘Decreasing Term Insurance’
The theory behind decreasing term insurance holds that, with age, certain liabilities and the need for high levels of insurance decreases. Numerous in-force decreasing term insurance policies take the form of mortgage life insurance, which affixes its benefit to the remaining mortgage of an insured’s home. Alone, decreasing term insurance may not be sufficient for an individual’s life insurance needs. Affordable standard term life insurance policies offer the security of a death benefit throughout the life of the contract.
Inexpensive Life Insurance Protection
Decreasing term insurance is a more affordable option than whole life or universal life insurance. The death benefit is designed to mirror the amortization schedule of a mortgage or other high personal debt not easily covered by personal assets or income. Decreasing term insurance allows a pure death benefit with no cash accumulation. As such, this insurance option has modest premiums for comparable benefit amounts to either a permanent or temporary life insurance.
For example, a 30-year-old male who is a non-smoker might pay a premium of $25 per month throughout the life of a 15-year $200,000 decreasing term policy, customized to parallel a mortgage amortization schedule. The monthly cost for the level-premium, decreasing term plan does not change. As the insured ages, the risk of the carrier increases. This increase in risk warrants the declining death benefit.
A permanent policy with the same face amount $200,000 could require monthly premium payments of $100 or more per month. While some universal or whole life policies allow reductions of face amounts when the insured uses the policy for loans or other advances, the policies frequently hold fixed death benefits.
Additional Advantages of Decreasing Term Life
The predominant use of decreasing term insurance is most often for personal asset protection. Small business partnerships also use a decreasing term life policy to protect indebtedness against startup costs and operational expenses. In the case of small businesses, if one partner dies, the death benefit proceeds from the decreasing term policy can help to fund continuing operations or retire the percentage of the remaining debt for which the deceased partner is responsible. The security allows Ithe business to guarantee commercial loan amounts affordably.
Term life insurance is a vital way to financially protect your loved ones after you die. Obtaining it offers peace of mind. It also guarantees your debts will be covered and your loved ones will be provided for.
Life insurance is also a valuable estate planning and tax saving tool. Life insurance debts are exempt from federal taxation. A financial professional may advise one to use life insurance benefits to help pay for estate taxes accumulated upon the death of a loved one. Whether you have no life insurance, or you haven’t reviewed your policy in a while, it is always a good idea to be aware of your options and be prepared. (For more, see: Is Life Insurance Through Work Enough?)
What Is Term Life Insurance?
Term insurance is arguably the least expensive and easiest type of life insurance you can purchase. It provides basic protection against your death. Your beneficiary receives a lump sum in an amount of your choosing in such an event. This type of insurance is also temporary. It provides coverage for just a designated period of time. The typical time span is during your working years.
If you’re unsure of how much to designate for life insurance, consider using your mortgage balance as a base amount. If a couple relies more on one spouse’s income, think about making the higher-income spouse’s policy even larger than the basic mortgage amount so the lower-income spouse has something left over after the mortgage is paid.
Starting a family? Consider adding additional term life insurance. Some financial experts suggest adding 10 times your annual income if you have kids under 10 years old, and five times your annual income if you have kids over 10. If you can’t afford that much coverage, just do what you can. Less coverage always beats zero coverage. (For related reading, see: 5 Financial Planning Decisions You Won’t Regret.)
How Does It Work?
As previously stated, term life insurance is in place for a period of time designated by you. The most common terms are 10, 20 and 30-year periods. The insurance policy continues to be valid for as long as you pay the premium. One of the benefits of term life insurance is the fact that the premium amount will never increase, regardless of your health’s condition.
A typical term life insurance coverage policy also guarantees a designated dying benefit. You set this specific amount and it will never change, regardless of the length of the policy. This means the insurance provider will pay that exact amount to your beneficiaries whether you die on the first day of coverage or the last. (For related reading, see: The Importance Of Life Insurance For Women.)
Who Should Obtain Term Life Insurance?
Term life insurance is a good choice for those looking to provide income replacement for their families should something happen to them. More specifically, this type of insurance provides solid, affordable protection for those that have children, carry significant financial obligations or own a company. (For more, see: Using Indexed Universal Life for Retirement Income.)
Types of Term Insurance
Level Term: This is the most commonly purchased type of term insurance. The term “level” refers to the death benefit amount during the term of the policy. So it pays the same benefit amount if death occurs at any point during the term. Common types of level term are:
Yearly renewable term
Five-year renewable term
Term to a specified age (usually 65)
Decreasing Term: Unlike level term, the death benefit in this type of insurance decreases at a predetermined rate over the life of the policy. Premiums are usually constant throughout the contract, and reductions in policy payout usually occur monthly or annually. Term lengths can vary from between one and 30 years.
The main benefit of decreasing term policies is their affordability. The theory behind them is that a person’s insurance coverage needs decrease with age and when certain liabilities and debts no longer exist. Decreasing term insurance is generally not advisable for someone with no other life insurance, however. (For related reading, see: The Advantages of Automating Your Financial Life.)
Term Life Insurance Quotes
Life insurance rates are mainly based on your health. If you’re in good health, then it’s easier to obtain a cheaper policy. But if you have a high-risk health condition, then the price of your coverage could be much higher. Different companies make different assessments based on a person’s medical background and how risky they believe you are to insure.
The process of obtaining a quote from a company includes going through a medical exam, after which a company will compare their results to your medical records. You will then receive a quote from the company that reflects your risk class, the amount of coverage you’re seeking and the level of term insurance you desire.
Remember a quote is not the same as an actual offer. For instance, your health many not be at exactly the same level you thought it was. An increase in price could stem from high cholesterol, high blood pressure, or other findings in your medical records you didn’t disclose in your initial phone interview with the insurance company. (For related reading, see: 6 Life Events That Call for Professional Financial Advice.)
If your premiums are much too high due to medical reasons or you are denied coverage, check if a group plan is available through your company. These group plans do not require a medical exam or physical.
How Quotes Are Determined
To break it down further, let’s closely examine some of the specific factors an insurance carrier’s underwriters will look at when determining a policy’s premium quote.
Age – Your age can make a major difference in the premium quote that you receive. Because of the health risks that come with age, prices for insurance increase significantly over time. Applying for term life insurance while you’re still young is ideal, as it’s an affordable way to obtain a large amount of coverage.
Gender – This is also a significant factor in the premium price of life insurance. Since research show that women tend to live several years longer than men, females will usually pay a lower premium.
Height and Weight – These measurements are important to insurance companies. Since obesity is considered to be a high-risk factor in life insurance coverage, premiums may be significantly higher for those considered to be overweight.
Smoking Status – Smoking is considered one of the highest risks to life expectancy and is one of the biggest factors in premium rates for all types of life insurance coverage. Those who are smokers or use other forms of tobacco can pay a staggering five times more than non smokers.
Health Status – Most life insurance companies require that applicants complete a medical exam to determine his or her overall health status. This usually includes blood pressure and heart rate readings, as well as blood and urine samples.
Lifestyle – Life insurance applicants are also typically interviewed about lifestyle choices. A company then determines if they are considered risky or dangerous habits. Activities that could result in higher premium rates for the applicant could include skydiving, hang gliding, scuba diving or race car driving.
Level of Coverage – Understandably, the higher the amount of coverage you wish to purchase, the more expensive your life insurance premium will be.
Why Quotes Vary
The premium quote a person is offered for the exact same life insurance policy can widely vary depending on the company. While some criteria for evaluating applicants can be similar, certain factors can differ from company to company. For example, some companies now take an applicant’s driving record into account when evaluating their level of risk, while others don’t. (For more, see: When to Update Your Life Insurance Beneficiaries.)
For this reason, it’s important to compare quotes from various companies before making a final decision on where you’ll obtain coverage. One way to accomplish this in an easy manner is to work with either a company or agency that has access to multiple insurance carriers. Then you can quickly compare policies, carriers, benefits and premium rates and choose the policy that makes the most sense for your situation. The goal is to find an insurer that will provide you with the best protection for the most affordable price. You can research the financial soundness of your insurer at A.M. Best.
Importance of Life Insurance Company Ratings
When shopping for the most affordable life insurance, it’s important to factor an insurance company’s rating into your final decision. Find out whether a particular company is financially stable and has a good reputation for paying out its policyholder claims. Obtaining cheap life insurance isn’t worth it if the company isn’t reputable.
Some of the companies that provide insurance ratings include Standard & Poor’s, M. Best, Fitch, Moody’s, Dun & Bradstreet and Egan-Jones Rating Company. These companies typically give insurance companies ratings in the form of a letter grade, with A++ being the highest. (For related reading, see: How Annuities Can Boost Your Retirement Confidence.)
The Better Business Bureau (BBB) is another good source that reveals how well an insurer pays its claims and the quality of its customer service. This organization will provide a letter grade. It also gives details regarding any complaints that have been filed with the company.
Difference Between Term and Permanent Life Insurance
The difference between term and permanent life insurance is quite simple. Term life insurance pays a predetermined sum if the insured dies during a specific period of time. For that reason, it can usually be obtained at an affordable rate.
On the other hand, permanent life insurance provides lifetime protection that does not expire. Most permanent policies offer a savings or investment component combined with the insurance coverage. For that reason, the premiums for permanent insurance are more costly than term policies.
Term life insurance is an affordable way to obtain protection for your loved ones after your death. Hopefully, you now realize it’s important not to rush into purchasing a policy. Take time to consider whether a particular policy meets your needs for the price, and seek advice from professionals.
Life insurance is, in many ways, a game of strategy. It’s not just a matter of simply finding the best rate—you want to find the best coverage for you, at a rate within your budget. Each person has their own unique situation, which is why you should work with a life insurance agent who can advise you on different carriers and plans. One option you might come across while shopping around is a decreasing term life insurance policy.
In this article, we’ll help you understand this coverage, and then offer a better solution to the need it’s meant to serve.
Quick Article Guide:
What is Term Life Insurance?
What is Decreasing Term Life Insurance?
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What is Term Life Insurance?
Term life is a type of life insurance that ensures a death benefit (money paid to your spouse or heirs to cover income loss and assets in the event of your death) with a fixed premium, for a set period of time (your term). It is the affordable counterpart to whole life insurance, which provides permanent coverage for life.
Many people seek term life insurance as a means to instant peace of mind, whether for general income purposes or to cover a major expense that they would not want to leave behind for their family to take on (such as a mortgage). Terms are generally available in 5-year increments ranging from 5 to 30 years, after which the policy will usually become renewable on an annual basis.
What is Decreasing Term Life Insurance?
Decreasing term life insurance provides a death benefit that gradually decreases—either monthly or annually—over the span of the policy. The idea is that as you age, you will pay down your debts and your liabilities will decrease; therefore, your family will require less of a payout to overcome any burden of debt you might leave behind. Decreasing term life insurance is commonly used as targeted coverage for one of the following debts:
Drawbacks of Decreasing Term Life
While a decreasing term life policy does effectively cover a mortgage by aligning the death benefit with the life of the loan, it doesn’t quite work for other types of loans. Here’s why:
You pay the same monthly premium for a decreasing payout
There are very limited carriers, as decreasing term life is somewhat of an outdated product
The premiums can be exorbitant
The beneficiary is actually the creditor, not your loved ones
Alternative: Term Layering (or Term Laddering)
With the notable drawbacks of decreasing term life insurance, there’s a different strategy you should consider: term layering (also called term laddering).
Ideally, the older you get, the more “self-insured” you become. When you retire, the goal is to have paid off all of your debts so you can leave a legacy to your family. Term layering enables you to stack two or more term life insurance policies to achieve the same effect as decreasing term life. If you’re in your 30s and 40s, your biggest vulnerability is your children.
You want to ensure that your debts are backed by life insurance, at least until they reach adulthood. For example, let’s say Bob is 35 years old and married with two children, ages 2 and 5. For the next 20 years, Bob will want to have the most coverage possible until the kids are grown and able to take care of themselves. He has a 30-year mortgage, so a 20-year term policy would leave a 10-year lapse in mortgage protection. At the same time, he also doesn’t need maximum coverage for a full 30-year term, because after 20 years, his children will hopefully be self-sufficient and he’ll need less life insurance.
To meet both of his needs, Bob buys two term life insurance policies: one for 20 years, and one for 30 years, each with a $500,000 death benefit. This also allows him to lock in 30 years of coverage while he is in good health and able to get preferred rates. After Bob’s 20-year policy expires, he will shed that policy’s monthly premium while still having the 30-year policy to mirror the mortgage. When the 30-year policy expires, he can renew his policy, convert it to a permanent policy, or buy a new policy altogether, based on his needs.
Work with an Independent Agent
we can helpTerm layering isn’t overly complicated, but there are a lot of factors that come into play, and you might even find yourself layering more than two policies for various purposes. To ensure that you get the right coverage and arrange your policies correctly, you should work with an independent life insurance agent that can shop multiple carriers for the best rates and products.
At JRC Insurance Group, our agents do not have sales quotas to meet, we’re just genuine people who want to match you with the best life insurance company possible. We work with over 45 top-rated companies, and have no doubt that we can find a company for you.