What Is Decreasing Term Insurance? Is It Right for You?

Decreasing term life insurance is a policy in which the benefit declines on either a monthly or annual basis. The size of the policy continues decreasing until either the policy pays out or the end of the coverage period. A decreasing term life insurance policy typically works best to cover a loan or other financial obligation that will reduce in size over a known period of time.

For example, if you want just enough life insurance to cover your mortgage so that your family would be able to keep your home if you pass away, a decreasing term policy's death benefit could be structured to decrease as you pay off the outstanding balance. Due to this reducing death benefit, decreasing term life insurance is often cheaper than a term life insurance policy.

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How does decreasing term life insurance work?

Decreasing term insurance, also known as DTA insurance, is different from a standard term, or level term, life insurance policy in the payout structure. While a level term life insurance policy has a face value that remains constant over the life of the policy, decreasing term insurance has a death benefit that decreases either monthly or annually. However, the two policies are similar, in that they both have constant premiums and term lengths that typically span five to 30 years.

Terminal and critical illness riders

Most decreasing term life insurance policies come with — or allow you to add on — terminal and critical illness riders. A terminal illness rider is usually included at no additional cost and allows you to access your policy's death benefit while still alive if you need the funds to cover expenses such as hospice care, the hiring of a caretaker or residence at a nursing home. The money is generally paid out on an as-needed basis and can reach up to 80% of the death benefit. However, you won't be able to use the rider unless you've been diagnosed with a terminal illness, meaning you have less than 12 months to live because of the condition.

A critical illness rider, on the other hand, is optional and often comes at an additional cost when added to a decreasing term insurance policy. This rider similarly allows you to collect a portion of the death benefit for expenses, but the funds often come in a tax-free lump sum. Whether you're critically ill is typically determined by the life insurance company and is only considered a critically ill diagnosis if you've had a serious issue, such as a heart attack, ALS (amyotrophic lateral sclerosis), kidney failure, a stroke or cancer. Insurers vary on their list of conditions that fall under the rider, so we recommend researching the provider's critical illness policy.

Why buy decreasing term life insurance?

If you are searching for life insurance to cover debts, loans or other financial obligations, then decreasing term life insurance can be a tool to cover obligations like these that decrease in size over a fixed period of time. A decreasing term policy can help ensure your beneficiaries receive enough money to pay the remaining portion of the debt if you pass away. Some debts you might use decreasing term insurance to cover include:

For instance, the decreasing term life insurance policy's death benefit can be structured to match your outstanding mortgage: As mortgage payments are made, the face value of the policy would decrease periodically. If you were to pass away, the policy would pay out to your chosen beneficiary, who would then be able to pay off the outstanding mortgage.

In this way, decreasing term insurance policies are similar to credit or mortgage life insurance policies. However, credit life insurance policies name the lender as the beneficiary, which is usually the bank. Decreasing term life insurance policies differ, in that they allow anyone to be named a beneficiary. You may want this flexibility to allow your loved ones to decide how to allocate the funds from the death benefit instead of the money going directly to the bank.

Similarly, when small businesses take out loans for operations, the owners may purchase decreasing term life insurance in case one of them passes away. This would help ensure any costs would continue to be paid out.

Besides coverage for loan payments, you might want a decreasing term life insurance policy if your financial obligations will decrease over the term of the policy. For example, if your kids are going off to college or starting their first job, you may expect less of a need for life insurance coverage over the next five to 10 years. In this case, a policy such as decreasing term life insurance, where the death benefit begins as a large amount and then gradually reduces over time, may give you the best assurance.

Cost of decreasing term life insurance

A decreasing term life insurance policy typically costs less than a level term life insurance policy. Since a decreasing term policy's death benefit reduces every period, the insurance company will not require such high premiums from you, due to the decreasing risk you present. It is important to remember that both types of policy premiums are constant throughout the term.

Choosing the best decreasing term insurance

The availability of decreasing term life insurance has declined in recent years but is still available from a few reputable insurance companies. Farmers, Banner Life Insurance Company, Prudential, Protective Life Insurance Company and John Hancock all offer decreasing term life insurance policies. Farmers, for instance, offers a policy with coverage starting at $25,000, which is available in 10-, 20-, and 30-year term lengths.

When shopping for the best decreasing term insurance for yourself, you should choose a policy that would cover unpredictable situations. For example, buying coverage that extends slightly longer than the term of your outstanding mortgage could be useful if you have to delay mortgage payments at any point. It can be helpful to think of possible situations like this in advance, so you can choose the best coverage possible.

While shopping for insurance coverage, we also recommend comparing quotes from multiple insurance companies to ensure you are receiving the best rate possible. Life insurance companies evaluate applicants differently, so, for example, if you have a preexisting condition, you may get a significantly cheaper rate with one insurer versus another.

When you should choose level term life insurance

Level term life insurance provides your beneficiaries with additional flexibility to cover unplanned expenses if you pass away. For example, you could purchase a policy that's large enough to cover the mortgage (as you would with a decreasing term insurance policy), and as your outstanding balance decreases, the excess coverage could be used by your family as they see fit. The money could go to any number of expenses, including education, food, travel and unforeseen financial troubles.

Also, level term insurance gives you a steady and higher death benefit throughout the life of the policy. Unless you're confident that your need for life insurance will decrease over time, then we recommend using a more steady policy like level term life insurance.

Once you've purchased life insurance, you won't be able to increase your coverage if your financial needs change without either purchasing a new policy or going through a scheduled reexamination. On the other hand, if you pay off your debt and require less coverage, it is sometimes possible to reduce the face value on level term insurance, depending on the insurance provider.