Decreasing Term Insurance

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Decreasing Term Insurance

Key takeaways

  • Decreasing term insurance provides a death benefit that declines over a predetermined schedule, often to match an amortizing debt (for example, a mortgage).
  • Premiums for these policies are typically lower than for level-term or permanent policies; premiums are often level for the term but some plans may reduce premiums over time.
  • Common uses include mortgage protection and guaranteeing repayment of business or personal loans.
  • The policy ends when the term expires and the death benefit reaches zero.

What it is

Decreasing term insurance is a form of term life coverage in which the face amount (the death benefit) decreases over the policy term according to a set schedule. The decline is usually monthly or annually and can be structured to mirror the amortization schedule of a loan. The policy provides only a death benefit and does not accumulate cash value.

How it works

  • At purchase the insurer and insured agree on the term length (often 1–30 years) and the schedule by which the benefit will decline.
  • Premiums are commonly level (unchanged) for the duration of the policy, though some policies may reduce premiums in tandem with the decreasing benefit.
  • If the insured dies during the term, the beneficiary receives the remaining face amount at that time. If the term expires, coverage and the benefit end.

Typical uses

  • Mortgage life insurance — benefits shrink as the mortgage balance is paid down.
  • Business loan protection — protects lenders or partners by covering outstanding business debt that decreases over time.
  • Personal loans or other amortizing liabilities where the insured wants coverage only for the outstanding balance.

Example

A 30-year-old non-smoker buys a 15-year decreasing term policy tied to a $200,000 mortgage. The policy might cost about $25 per month while the death benefit declines with the mortgage balance. By contrast, a permanent policy with a $200,000 face amount could cost $100+ per month because it maintains a fixed benefit and builds cash value.

Pros

  • Lower cost compared with level-term and permanent life insurance for similar initial face amounts.
  • Matches protection to a specific, decreasing liability (e.g., mortgage), avoiding over-insurance as debt declines.
  • Simple structure — pure death benefit with no cash-value component.

Cons

  • Death benefit falls over time; coverage may become inadequate if financial needs increase or new liabilities arise.
  • At term end, there is typically no residual value or payout.
  • Less flexible than level-term policies for long-term income replacement or dependent protection.
  • May not provide sufficient protection for families who need a stable death benefit for income replacement.

Who might benefit

  • Homeowners who want life insurance specifically to cover a mortgage balance.
  • Small business owners who need to guarantee repayment of a business loan or protect partner liabilities.
  • Borrowers whose primary insurance need is to cover a specific declining debt rather than ongoing income replacement.

When it may not be the best fit

  • If you need level coverage for dependents, education costs, or income replacement beyond the loan’s life.
  • When you want a policy that builds cash value or can be used flexibly later.
  • If you prefer guaranteed coverage amounts that do not decline with time.

What happens at the end of the policy

When the term ends, the coverage and death benefit terminate. There is generally no payout or accumulated value unless the policy includes a conversion or renewal option agreed at purchase.

Shopping checklist

  • Confirm whether a lender requires decreasing-term coverage and whether the policy’s schedule matches the loan amortization.
  • Compare total cost and coverage trade-offs with level-term and permanent policies.
  • Check for conversion options (ability to convert to a permanent policy) and renewal terms.
  • Review exclusions, contestability periods, and any riders that may add value.

Decreasing term insurance can be an economical, targeted way to protect repayment of a specific declining debt. Compare it with level-term options to ensure it aligns with your overall financial protection needs.