Decreasing face term life insurance is a specific type of policy where the coverage decreases over time. It is similar to other term products, except for this one major difference. In typical term life insurance, the coverage amount (“face amount” or “death benefit”) is flat. Decreasing term has the coverage amount decline over the life of the policy, usually annually until the term ends. At the end of the term the policy expires as there is no more coverage.
Decreasing term life insurance is usually purchased to guarantee the balance on a loan, such as a mortgage or business loan. As the loan is paid off, the term policy decreases similarly.
The main benefits of decreasing term is the lower price than level term and coverage that aligns with your decreasing insurance needs. The price on decreasing term can be significantly lower due to the decreasing coverage offsetting much of the higher probability of you dying.
Decreasing term is still not as popular as a traditional level term product. However, more and more insurers are starting to explore offering a decreasing term product.
What Is Decreasing Face Term Life Insurance?
Decreasing face term life insurance has a coverage the declines over the life of the policy. It is very similar to regular term insurance in almost every way other than the diminishing coverage.
Decreasing term products are typically for 5 to 30 years. When you buy the policy you are given the exact schedule of decreases in coverage. Often decreasing term life insurance is purchased to cover a loan like mortgage or a business loan.
When decreasing term is purchased to align with a mortgage, it is called ‘mortgage protection insurance’. Also, when small business partnerships take on debt, the bank may require a decreasing term loan on each partner. This is often called ‘key man insurance’.
Since the coverage decreases each year, there is generally no term extension options available.
What Are The Benefits of Decreasing Term?
The main benefit of decreasing term insurance is the low cost. For the same starting coverage, you can see 30% or more lower premiums than level term, depending on the decreasing design.
Additionally, banks may require a decreasing policy to back any small business loans. This helps small business get the capital to grow and expand.
If you want to have coverage for a specific liability like a mortgage, you can align your policy to the amortization schedule of you loan. Mortgage protection insurance is a cheap way to buy coverage for a single liability.
When Should You Buy Decreasing Term?
The 2 most common use case of decreasing term is:
- Mortgage protection insurance (MPI). MPI uses decreasing term that aligns with your mortgage balance. In case you die, your mortgage will be paid off by your decreasing term policy.
- Back a small business loan/debt. Often a bank or business partner will request a policy that will cover the balance on any business loan.
- In small business partnerships, a decreasing term life policy will protect one partner from the debt and start-up cost if the other partner passes.
[Professor B.T. Effer Note – Many times a bank will require decreasing term policies when issuing a small business loan. For example, if a small business wants to expand for $100,000 and take a 5-year loan. The bank may require a $100,000 decreasing term coverage over the 5 years that reduces by the same rate.]
Additionally, many people’s insurance needs decrease over time. If you are using life insurance to replace future salary, every year your needs decrease. The insurance industry is starting to look more and more at this ‘income replacement’ use for decreasing term.
However, all life insurance decisions are unique. And you should review your purchase decision as part of your personal financial plan.
Decrease Life Insurance Vs. Level Term Insurance
Term life insurance is coverage that will provide a death benefit over a certain period of time. Most term insurance has a level death benefit. However, with decreasing term the coverage amount declines at a pre-determined schedule.
Decreasing term can be purchased to align with a loan, like a mortgage or business loan. Or decreasing term can be used when your insurance needs decrease over time.
| Level Term | Decreasing Term | |
|---|---|---|
| Common Durations | 5 to 40 years | 3 to 30 years |
| Death Benefit | Level | Decreases on a schedule |
| Premium | Guaranteed level | Typically guaranteed level but also decreasing premium |
| Uses | Coverage for a set period of time | Coverage of a debt or to align with your decreasing need |
Alternatives To Decreasing Term
Life insurance is part of the protection pillar for your 5 pillars of personal finance. If decreasing term doesn’t work for you, there are alternatives available.
- Flat Face Amount Term – A traditional term policy may be better suited for your needs. It can cover your debt and also leave some extra coverage for your family
- Term Insurance Ladder Strategy – A term insurance ladder is when you buy multiple smaller term policies with different maturities. Term ladders attempt to have a similar decreasing coverage over time
- Self-insurance – You can use other assets or portfolios as collateral on loans.
There are many different insurance products out there and you should find one that works best for you.
Pros & Cons of Decreasing Term
Decreasing term insurance can be a good fit for your insurance coverage needs.
Pros of Decreasing Term:
- Can align your insurance coverage with your needs
- Decreasing term can match the death benefit to a loan like a mortgage or business loan
- Lower cost for the same initial amount of coverage
Cons of Decreasing Term:
- Coverage decreases and can be immaterial at later policy years
- Premiums typically flat over the life of the product making it relatively expensive for the coverage you receive in later years
- There is no coverage at the end of the term so there is no post-level term or term conversion rider
- Fewer insurance carriers offer decreasing term limiting options
The Final Word
Decreasing term life insurance is still a relative niche product. It is mainly used to back business loans and mortgages. However, as the insurance industry continues to try to innovate, it is exploring this product for income replacement needs. Since your life insurance coverage tends to decrease over time, a product that aligns with your need may be beneficial.
The major insurance carriers have started to dip their toes into the decreasing term market. Making this an interesting area to keep an eye on.
Frequently Asked Questions – Decreasing Face Term Life Insurance
Decreasing face term life insurance is similar to term insurance but the coverage decreases over time. Typically as you age, your coverage needs decrease and decreasing term tries to align with your need. Decreasing face term will be cheaper than a regular term product with the same initial face amount.
Decreasing term is typically purchased to cover a specific debt, like a mortgage or business loan.
Additionally, as you get older, your life insurance needs tend to decrease. Common reasons people buy term products are to replace future salary, cover a mortgage, or to pay for a child’s college. However, as time passes and your savings grow, you need less coverage for each of these. Additionally, decreasing term will be significantly cheaper than term with a level face amount.
Yes. Because the death benefit paid decreases over the life of the loan, it is cheaper than a flat term product.
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