Life Insurance Blog

With decreasing term life insurance, the payout doesn’t remain constant throughout the term, but instead goes down on a scheduled basis as the policy matures.

For example, the payout may be $200,000 in the first five years of a twenty-year policy, and then $150,000 in the next five years, and so on until there’s only $50,000 in the last five years. In the meantime, the monthly premiums would either reduce in line with the payout or they would stay the same.

There are a number of reasons why this approach might be adopted. The first is when life insurance is taken out to cover a loan. Lenders will often insist on life insurance as a condition for unsecured loans, as the borrower’s death can obviously interfere with repaying the loan. In this circumstance, life insurance will make the borrowed amount good.

As time passes and the loan’s principal is repaid, then there’s not as much need for full life insurance coverage at the end of the loan as there is at the beginning. If the payout is fixed through the term of the life insurance, the borrower would have to either purchase too much life insurance to cover the loan amount at the end of the term or purchase a lower amount of life insurance which wouldn’t adequately cover the loan amount at the beginning of the term.

Decreasing term life insurance can be considerably cheaper than a policy with a fixed payout, making it very attractive for an applicant who’s looking to cover a loan. In some cases the decreasing term life insurance can mirror the loan, and in this way provide exactly the right amount of insurance.

Another group of people who tend to use decreasing term life insurance are parents. In many cases children are more expensive at the beginning of their lives than they are in their teens, particularly when factoring in the expense of one parent giving up work. The staging here cannot be as exact as the staging for a loan, but it can allow for a person to cover their family more appropriately than a fixed payout.