Decreasing Term: A low cost option

Decreasing Term Life Insurance is the type of insurance most often associated with home and auto loans. The insured pays a level premium for the length of the term, while the face value—or amount that will be paid—drops over time. Its purpose when provided by a bank or loan company is to pay off the balance of your loan if you should die prematurely. The policy is calculated so that when your loan is paid, the insurance will expire.

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Decreasing Term however, is available to individuals in other circumstances. One of the most common is as a conversion from a level term that has reached maturity. However, many companies offer decreasing term as a cheap option for individuals that need a high face value initially but will need less later in life. You will pay the same premium for as long as the policy can be renewed (often not longer than age 85), but the premium will be very low. That's because the company will have less risk as time goes on—rather than more, which is the case with usual Term or whole life policies. Company risk means the amount the company will have to pay minus the premium they have collected. The risk is worth taking if you are young and healthy.

While "decreasing" may sound like you would be getting less and less for the same amount of money, the face value actually drops very slowly, especially in the first few years. Some companies even offer a policy that remains level in five year bands, and most offer conversion options, which means you can convert to whole life before the face value drops too far to pay final expenses.

Like other Terms, it accumulates no cash value. However, some companies offer a savings plan rider, allowing you to accumulate funds that you can use when you retire. The savings fund is not part of the face value of the insurance. If you were to die, the beneficiary would receive the face value of the insurance tax free, but would owe taxes on any interest paid into the savings fund.

When purchasing this type of coverage, you should search for one with a minimum death benefit guarantee. This would mean that as long as you renew your premium, your face value will never drop below a certain amount.

While decreasing terms are not particularly popular, they can provide a good level of coverage for a low cost, at least on a short term basis.

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