Decreasing Term Life: Is It Right For You?

The most common form of life insurance sold to young people is Term. Without the help of a knowledgeable agent, it may or may not be the best, but it is cheap and can be used to obtain a very high face value for a low premium—at least for a limited time period. A variation that is even cheaper, however, is Decreasing Term. Usually, you don't want this type, but there may be circumstances when it may be suitable.
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Decreasing Term was once used almost exclusively by banks as a type of mortgage life insurance. If you purchase mortgage life insurance along with acquiring your mortgage, decreasing term is what you will get. You pay a level premium for a period of time, usually the same time period as your mortgage. Usually the face value stays level or nearly level for the first two to five years, keeping pace with the principle owed on your mortgage. Then, while you pay the same premium, the face value drops—slowly at first, but in larger and larger annual chunks as time goes on. At the end of the time period, your policy expires and your premium payments end.

This product is no longer offered only by the banks. In fact, if you want a decreasing term for the purpose of protecting a large debt, you will find it much cheaper when purchased through an insurance agent or independent broker. Unlike a regular term policy, decreasing term is not renewable at the end of the term. You will have to purchase a new policy.

Decreasing Life is also a conversion possibility for a regular term insurance at the end of the term. Some companies do not offer whole life or universal, but they must be able to offer some type of conversion to allow you to keep your term when your 10 or 20 years is up. The most common conversion is to annually renewable—which keeps the face value but increases the premium to a higher price than you would be paying if you took out that some amount at your then current age. Thereafter, your premium goes up every year. A policy that was only a few hundred a year is suddenly a few thousand and increasing, but if you have health problems you will not be able to purchase a new—and cheaper policy. Decreasing Term in an option; you will keep the same premium, and your face value will actually increase for the first couple of years. Thereafter it will drop, slowly at first, and then very quickly until it is completely gone by age 85. Decreasing term is a gamble; you are gambling that you won't live long enough for the value to completely disappear.

Generally, decreasing term is not your best option for life insurance unless its primary purpose is to protect a large debt or the primary insured is terminally ill with a limited life expectancy.
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