Decreasing Term Life:
Is It Right For You?
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.
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.
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.
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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