What is decreasing term life insurance?


Decreasing term life insurance, as the name suggests, is term insurance that decreases over time, according to a specified schedule. This kind of life insurance is usually used to cover purchases or long term loans paid via installment, such as a mortgage.

When you take out a loan or a mortgage, the lender will usually require you to take decreasing term life insurance, to ensure that the loan is paid, even in the event of your death. The reason why it's decreasing is that your need for insurance also decreases as you slowly pay off your loan.

For example, you have a 10-year loan. You buy decreasing term life insurance. The first year's coverage should be equal to the amount of the loan, with annual decreases equal to the portion of the loan that has been paid off. The insurance is scheduled in such a way that when the debt is fully paid, thus, at the end of the 10th year, the coverage of the insurance is also down to zero. At the end of the 10th year, the life insurance then ceases to be in effect.

The advantage of getting a decreasing term life insurance is that the premiums you pay will be low at the onset. Although, the premiums remain constant throughout the life of the policy, the premiums for this are cheaper than regular term life insurance. And your family or the lender will only get the amount needed to pay for the loan. Also, for those who want to save up on premiums, decreasing term life insurance may prove useful. As your family gets older and becomes more financially established, you may find that you only need to provide for reduced cover.

However, if you are thinking of buying decreasing term life insurance as a way of providing for your family in the event of your death, you should also consider the fact that the value of your money will be smaller due to inflation. Thus, this kind of insurance is not really ideal as protection for the financial wellbeing of the family. This is most ideal for loans and mortgages.

And since this is a term life insurance, there are no cash values and no maturity value to expect at the end of the coverage period.

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