ight now we’re going to talk about what is decreasing term insurance. But before we can answer that question we need to know what is term insurance.
Term insurance is basically considered to be the simplest form of life insurance available. By its name, term it means that a policy is issued that will cover a person for a specific period of time. As an example, let’s say that you purchase a 100,000 dollar term insurance policy. The $100,000 is called the face amount, and what happens with this policy is that if I am the insured person and you are my beneficiary. If I die at any time within the 365 days of the one-year term for this policy, the beneficiary would collect the face amount. However, in the 366 days, the policy would cease to exist unless it was renewed.
Now, in addition to annual renewable term or yearly renewable term whichever word you hear it called by. There are other term policies which last longer. Let’s say 5 years, 10 years, 15 years, 20 years as long as 30 years. It is those types of term policies that can be used when you consider decreasing term insurance.
So let’s talk about what decreasing term life insurance is. Now as an example, you buy a home you and get age 30-year mortgage, you want to be sure that your family’s home is always protected even if you were to die prematurely. So you perch a 30-year term insurance policy. The policy lasts the same period of time as your mortgage. Over time ideally, your mortgage will decrease as you make your payments and so will the face amount of the decreasing term insurance policy. It starts out with the amount that the house, what the mortgage amount owed when it starts over the 30-year period it goes down to zero, just as your mortgage will. Now understand the face amount starts high and goes low your premium, however, stays the same for the entire 30-year period.
How to Decrease Term Life Insurance
When looking to decrease term insurance coverage, you can take the face amount also known as the death benefit and lower that. In addition to that, you may have certain benefits or riders on the policy. You may have a waiver of premium or additional purchase benefit or things such as that.
Those types of benefits add to the premium of the policy. So you may be looking to lower the price of your insurance that may be one way to do it, is to take some of those riders off or you can decrease the face amount or death amount of your policy.
One alternative to doing that, just to keep your options open is a lot of term insurance policies can be converted to a whole life policy, that’s more of an upgrade than a decrease term life insurance. But again, when looking to decrease your term life insurance, it is a relatively simple product, you’re just going to be looking at reducing your death benefit or face value which is the amount of money that would be paid in the event of your passing.
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Now you may ask yourself, why would I want decreasing term life insurance? Well because of the nature of decreasing term, remember, face amount starts high but drops off over the long length of the mortgage and basically goes to zero. The amount that the insurance company has at risk over that 30-year period declines decreases over time. Because of that, they’re willing to give you a lower premium than they would charge you if the face amount were to stay constant for the 30 year period. So the reason people consider decreasing term insurance because it saves them money. Now as you might suspect, this decreasing term insurance happens to work very well with mortgages. So you may also hear it called mortgage protection insurance.