In this article, we explain why for most people buying level term life insurance is a better financial decision than purchasing a decreasing term life insurance policy.
We also offer you a strategy for buying multiple life insurance policies (called laddering) to ensure you’re paying the right amount for life insurance only when you need it.
What is decreasing term life insurance?
You’re probably wondering what decreases when you buy a decreasing term life insurance policy. The answer is the death benefit.
Maybe you’re wondering what a death benefit is?
Fair enough. Most of us don’t often link the words death with benefit very often in our daily life.
Length of Coverage + Death Benefit = Cost of Life Insurance
When you buy any type of life insurance policy, you will make two basic choices:
- How long do I want my life insurance policy to last?
- How much money do I need paid out upon my death to my family or beneficiaries?
Your answer to question one is the length of your term. You can choose to insure yourself for a period of time that will end after a certain number of years (term life insurance) or your entire life (whole life insurance).
Your answer to question two is the amount of coverage you wish to buy which is the death benefit. Quotacy, for example, sells life insurance policies ranging from thousands of dollars upward to $65 million+.
» Calculate: Life insurance needs calculator
In general, the longer your life insurance policy lasts, the higher it costs. This is also true for policy coverage amounts. A life insurance policy with a $1,000,000 death benefit will cost more than one paying a death benefit of $750,000.
Decreasing Your Death Benefit to Save Money
If you decide to buy a decreasing term life insurance, your death benefit will gradually decrease over the time you own your policy.
This means that either monthly or annually the amount of money that will be paid to your family upon your death lessens as time goes on.
Why would you want less money to go to your family?
As with most things, it has to do with potentially saving some money. Let’s help you understand how decreasing term life policies work and why people sometimes buy them.
How does decreasing term life insurance work?
Decreasing term life insurance policies are available for terms lasting from one to 30 years.
Usually people buy a decreasing term life policy that lasts only for the amount of years that they need to cover a specific debt—a home mortgage, car financing, or student loans, for example.
As your loan amount will decrease over time as you repay it, the death benefit of your decreasing term life insurance policy can decrease as well.
The logic behind this is that you don’t want to be overinsured or pay more for your life insurance than you need to.
Decreasing term life insurance policies can be less expensive than a standard level term life insurance policy—this is why some people consider buying them.
Should I buy decreasing term life insurance?
There are three scenarios when it might make sense to purchase a decreasing term life insurance policy.
[Spoiler alert!]It might be wiser to consider laddering multiple life insurance policies to achieve the same goal, but with more protection for the unexpected events that tend to happen in life.
Three Scenarios for Decreasing Term Life Insurance
- You know that your children are independent from you financially and your spouse is fully set with income and retirement benefits, so you don’t need life insurance to replace income or augment retirement savings.
- You are buying life insurance solely to secure a business loan that is guaranteed to be paid off within the time frame of your decreasing term life policy.
- You are buying life insurance only to cover the time period when you are repaying your mortgage and know it can be repaid within the term of your decreasing term life insurance policy.
In all three cases, you know that you don’t need any extra money within the time frame that you are buying the decreasing term life insurance policy. If this is the case, then make sure to compare your monthly cost for a decreasing term life insurance policy versus a level term life insurance policy to make sure that your premium for decreasing term life is indeed less expensive.
A simple way to do this is by using our level term life insurance quoting tool. You don’t have to share your personal information to get within minutes a no cost, no obligation term life quote from dozens of the best life insurance companies.
Taking the time to compare your quotes makes sense because if you can pay less for a level term life insurance policy that suits your needs, you should do it. There is no sense in paying more for less death benefit over the same term.
What is level term life insurance?
So, maybe you’re wondering what is level term life insurance? It’s pretty simple to understand.
The most common policy scenario for most Americans is a level term life insurance policy that covers $500,000 for 20 years. For most people this could easily cost on average between $20 to $30 per month. Millions of families have chosen to buy level term life insurance versus the other types available.
The level part of level term life insurance means that the cost of your life insurance every month will not change over the life of the policy along with your death benefit. Level in this case means unchanging.
Why does level term life insurance benefit you?
Most people buy life insurance to give them peace of mind that their family (or business) will have enough money to carry on after their death. If the terms of your life insurance policy are guaranteed not to change over time, this also guarantees your peace of mind won’t change over time.
$1,000,000 Dream Home
Let’s say you used our life insurance calculator to determine that you need $1,000,000 to cover the remaining 10 years of your mortgage on your dream home. You want to guarantee that your family would not have to move if you died by using life insurance to pay off your mortgage.
You could accomplish this goal with a decreasing term life insurance product, but with level term your family would also receive some extra death benefit money to cover the unexpected in life, such as medical bills or other expenses that may arise after you have purchased your life insurance policy.
You can’t anticipate everything in life. The extra financial cushion might be very helpful.
Should I buy level term life insurance?
If you know you don’t need your life insurance to last your entire life, meaning that you have ruled out buying permanent life insurance, then term life is a very affordable option to consider. Test drive our quoting tool to see how affordable it might be for you to get peace of mind.
Maybe you haven’t ruled out whole life insurance yet. If not, then keep reading as we’ll go over the basics of that option for you to consider next.
See what you’d pay for life insurance
What is whole life insurance?
Whole life insurance is a type of insurance that does not expire. It lasts your entire lifetime guaranteeing that the death benefit will be paid out to your family no matter when you die.
Most people would say that’s the type of life insurance I want to buy (!)—until they find out that the cost of permanently being insured is expensive.
On average whole life insurance can be 7 to 10 times more expensive than term life insurance.
How does whole life insurance work?
The reason that whole life insurance is more expensive is because the life insurance company’s risk of paying a death benefit is 100%.
With term life insurance a smaller percentage of people will die while their policy is active, so the life insurance company is less likely to pay every death benefit of those people in one shared risk pool.
Should I buy whole life insurance?
Although many personal finance gurus legitimately advise that people don’t buy whole life insurance, there are some reasons why intelligent people still do.
Here are some scenarios when it makes sense to consider a policy that lasts your lifetime:
- You have a family member who will never be fully able to care for themselves, such as a special needs child or disabled adult.
- You are a high net worth individual working with a financial planner to maximize wealth transfer to future generations of your family.
- You need a life insurance policy to cover your final expenses.
Whole life insurance is a more complex financial product (more policy variables to choose from) with a higher level of investment (higher cost to own).
What is the ladder strategy for buying life insurance?
Sometimes it makes more financial sense to buy multiple term life insurance policies that last for different terms (periods of time) versus one life insurance policy.
For example, in the chart above you can see how one person decided to buy $400,000 worth of life insurance for $36 per month spread across three level term life insurance policies.
» Compare: Term life insurance quotes
When does laddering life insurance policies make financial sense?
Laddering—meaning buying multiple level term life insurance policies that end as each step is accomplished—makes sense when you know that your need for life insurance coverage will end at specific times.
For example, laddering three policies might save you money each month over the long run of 35 years. If after 20 years, you would no longer need the first two policies shown above, because your mortgage and student loans will be paid off, then it makes sense for the coverage to end on those two policies.
You would still have the 35-year level term life insurance policy to financially protect your family and provide an inheritance for them, if you should die within that policy period.
How should I decide which type of life insurance I need?
Most families need a level term life insurance policy. It’s affordable and can be customized to meet your family’s financial protection needs.
Take a look at our life insurance buyer’s guide if you aren’t sure which type of life insurance you need.
About the writer
Quotacy is the country’s leading broker for buying life insurance online. We are obsessed with making it easy for everyone who has loved ones who depend upon them to have life insurance.