If you’re in the midst of reassessing your expenses, you may be thinking about getting a decreasing term life insurance policy because you’d like to save on monthly premiums.
As you know, spending less money is essential to build your savings; and if you spend less you’ll have more to set aside for unexpected expenses. You’re probably also limiting your expenditures to have greater financial security—and that’s exactly what term life insurance provides.
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Buying a decreasing term life insurance policy may mean that there’s a greater chance that your family will face financial uncertainty in the future. Less coverage means that your family will have fewer funds to cover debts, your end-of-life expenses, and make up for the loss of your income.
That’s the opposite of what you want to achieve.
Let’s take a look at a few reasons why you might be thinking about purchasing decreasing term life insurance coverage and explore how you can find solutions that won’t mean less financial protection for your family.
What Is Decreasing Term Life Insurance Coverage?
Decreasing term life insurance is similar to level term life insurance, but with one difference. The difference is that instead of offering a locked-in amount of coverage that lasts over the entire term—the duration of the policy—the coverage decreases in value at a set rate.
Usually this type of life insurance is purchased when the debt that you are insuring—like a home mortgage—will decrease at a set rate over time as well.
Prices for decreasing term life insurance typically start lower than prices for level term life plans because the decreasing coverage amount is less risky for the insurance carrier.
Despite the lower initial price, as a decreasing term life policy ages, you will still need to pay the same price even though the plan offers less coverage over time.
If you are considering buying a decreasing term life insurance policy, Quotacy recommends instead a strategy called laddering. This alternative offers affordability without compromising coverage.
Let’s take a look at why you might be considering a decreasing term life insurance policy and then discuss laddering policies.
Are You Getting a Decreasing Term Life Insurance Policy to Save for Your Child’s College Tuition?
If you are the parent of a new (or soon-to-be) college student, you may be preoccupied with the expenses that you will face over the next four years. That’s completely normal. And, with the average yearly tuition for out-of-state students exceeding $25,620 per year—and tuition costs rising frequently—it’s almost guaranteed that you or your student may take on loans.
In either circumstance, less life insurance coverage equals greater financial vulnerability.
If you were to pass away, a reduced amount of life insurance coverage might mean your child will face a considerable financial burden meeting college tuition along with supporting themselves (and perhaps younger siblings).
Are You Looking to Save Money When You Buy a New Home?
After college tuition, purchasing a home will likely be the most significant expense that you will face in your lifetime.
While getting a decreasing life insurance policy may seem like a simple way to not be overinsured as your mortgage goes down over time, the benefits won’t necessarily outweigh the risk to your financial security. Whether you have a fixed-rate or adjustable rate mortgage, cost-of-living expenses will continue to increase over time, as will your family’s needs.
If you were to die suddenly, an unpleasant trifecta of burdens—your new mortgage, a loss of income, and the possibility of a higher-cost-of-living—would become your family’s responsibility. Less coverage will mean less financial security if you don’t have a crystal clear picture of how much insurance you may need.
Are You Cutting Back on Coverage to Care for a Parent?
Approximately one in six Americans financially support an elderly, disabled parent or relative. Unsurprisingly, this can be costly.
If you are one of them, you may be hoping to reduce your general expenses by cutting back on insurance coverage—enabling you to devote more resources to caring for your parent.
However, having less coverage means that your family may face a challenge at a time when need is high if caring for your parent becomes more expensive than you anticipated. If your coverage is reduced significantly and something happens to you, your family may have to cover many of your end-of-life expenses and debts on their own, as well as support your parent or relative.
Why Just Enough Coverage Rarely Is Enough Coverage
Trying to gauge how much insurance coverage is enough to protect your family can be difficult.
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It may be tempting attempt to calculate how much you’d like to pay in premiums and use that to determine how much coverage you’ll seek.
Doing that, however, is taking a significant (and unnecessary) risk. Decreasing your life insurance coverage to an amount that seems like just enough means that you’re not taking into account future events that may change your insurance needs.
For example, if your family experiences a catastrophic illness or job loss, your savings may be far less than you planned when you pass away. Decreasing the amount of insurance that you have now may cause your loved ones hardship in the future.
An Alternative to Decreasing Life Insurance: The Ladder Strategy
The Ladder Strategy is a method of combining separate term life insurance policies in a way that decreases your coverage over time—saving you money now in a way that still ensures you and your loved ones will have the right amount of coverage in the long term.
Rather than getting one big term life insurance policy that lasts a long time, the ladder strategy stacks multiple smaller life insurance policies of different lengths to save money and offer a decreasing amount of coverage.
For example, imagine a 35-year-old who needs $300,000 in coverage right now, but knows that their costs will go down as time goes on. This person could buy a $300,000 life insurance policy for 30 years that would cost around $9000 over the course of 30 years.
Alternatively, they could use the ladder strategy and buy three policies for $100,000 each that respectively last 10, 20, and 30 years.
After 10 years, the first policy will end and they will only have to pay for the remaining two and so on. The 30-year cost using this ladder strategy would be around $6500; that’s a savings of $2500.
As long as you have a valid reason for purchasing life insurance and the income to justify the total amount of coverage you want, you’re free to split the total coverage amount that you qualify for into multiple, smaller policies when you apply. We suggest that you do this with one carrier, if possible, as often it will save you money.
Quotacy’s advisors can help you create a life insurance plan that is suited to your needs.
If you are a new parent supporting elderly parents as well, this approach allows you to select one policy that will provide you with coverage through your children’s college tuition years and another that provides coverage through your elderly parents’ retirement years.
This laddering strategy lets you tailor your coverage to your needs so that you’re not compromising your financial security.
How to Assess Your Insurance Needs
So, when shopping for decreasing term life insurance policy alternatives—like the Ladder Strategy—how do you determine how much level term life insurance coverage will make sense for your family?
Look at your current financial obligations—credit card debts, your mortgage, or your children’s college tuition. Then think about your future goals. If you pass away before retirement, how will your spouse manage without your income? Will you be able to help your children with student loans if they graduate with significant debt?
Fortunately, you don’t have to figure this out on your own. Quotacy offers a free insurance needs calculator that shows you quotes instantly after you answer a few simple questions.
You won’t have to sign up for a service, give us any personal information, or get on the phone with one of our life insurance advisors (unless you want to, of course). At Quotacy, we give you no cost, side-by-side quotes for term life policies that will work within your budget and offer your family the coverage that they need.
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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.