February 18, 2021

What is decreasing term life insurance and who should get it?

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There are two types of life insurance: permanent life and term life. Term life is more affordable because unlike permanent life insurance, term life doesn’t have a cash value component. And unlike permanent life insurance, term life policies expire after a specified period of time, so you won’t necessarily have coverage for the rest of your life.

There are different types of term life insurance. The most common is level term life insurance, where your premium and death benefit remain the same during the policy. Unlike level term life insurance, decreasing term life insurance’s death benefit decreases over the term of the policy.

Because half of Americans who have life insurance are underinsured  — meaning their death benefit would not cover expenses like mortgage, college, food, debts, and clothing for dependents in the event of their death — a decreasing term life policy may not benefit most people.

Most decreasing term life insurance policies are connected to a mortgage, business loan, or personal loan. The amount of the death benefit is equal to the mortgage or loan, with the length equal to the timeframe of the debt.

Decreasing term life insurance is less expensive than a regular level term life insurance policy because the death benefit decreases over the term of the policy. An example of a decreasing term life policy is mortgage protection insurance, referred to as MPI. MPI should not be confused with mortgage insurance, referred to as PMI or MIP.

Mortgage protection insurance is a decreasing term life insurance product that can pay off your mortgage if you die. Typically, the beneficiary is the bank. The MPI policy is tied to your mortgage amortization schedule, so the term length is the same as your mortgage. As your mortgage decreases, so does the death benefit that will be paid out to your beneficiaries. 

Because most Americans are underinsured, the disadvantage of decreasing term life policies like mortgage protection insurance is that you will be left uninsured if you pay off the loan and you don’t have any other insurance policies in place. The purpose of these policies are to pay off a specific debt like a mortgage or personal loan. 

Most people get life insurance to cover the mortgage, education, and other expenses so their family can continue after they die. The goal of having life insurance is to ease the burden on your loved ones after your loss. If you need life insurance to cover other expenses besides your mortgage, you may be better off with a regular level term life insurance policy.

The two major differences between term life insurance and decreasing term life insurance are how the death benefit and premiums are calculated. Decreasing term life insurance’s death benefit equals the amount of debt — mortgage or loan — with a term equal to the length of the debt. As your debt decreases, so does your death benefit. 

With a traditional level term life insurance policy, the premium and death benefit remains the same during the period of the policy. 

When considering life insurance, it is wise to consult a financial advisor, accountant, and estate planning attorney to make sure you have the proper coverage you need for your goals and budget. Your life insurance needs will change as you age and must consider children, marriage, divorce, retirement, and caring for aging parents. Once you’ve signed on the dotted line, it’s a lot more difficult to make changes if you need to adjust your coverage.

Ronda Lee is an associate editor for insurance at Personal Finance Insider covering life, auto, homeowners, and renters insurance for consumers. She is also a licensed attorney who practiced litigation and insurance defense.

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