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Decreasing Term Insurance

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How Does Decreasing Term Insurance Work?

Decreasing term insurance is also a form of renewable term life insurance. It is one in which the coverage amount available to the policyholder gradually decreases over the course of the policy’s duration. You’ll pay the same monthly or annual premium during the contract duration. Insurance policies can have durations anything from one year to three decades.

Term life insurance with a decreasing death benefit is commonly used to guarantee the final payments on an amortizing loan. This may be a mortgage or business loan. Term life insurance with a fixed premium is a good comparison.

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Understanding the Concept

Death benefits from term life insurance policies are paid out for a limited period. For example, a 20-year term life insurance policy would have fixed premiums and a fixed death payout. As opposed to level term insurance, this insurance has a diminishing death benefit and premiums over time. 

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At the time of purchase, the insured and insurer will agree on a schedule for these payments. The schedule may follow industry standards or be tailored to the insured’s specific needs.

The Pros

Decreasing term insurance is often used to safeguard one’s assets. A decreasing term life insurance policy is another tool used by small company partnerships. It shields creditors from the impact of initial investment and ongoing operating costs.

After the death of a business partner, the decreasing term policy’s death benefit can be used by the other party. It may pay off the dead partner’s share of the company’s debts or keep the firm running. As a result of the security, the company can afford to guarantee larger commercial loan amounts.

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This insurance is more cost-effective than other types of life insurance, such as whole life or universal life. Death benefits are structured to resemble the repayment terms of a mortgage or other large, nontax-deductible debt.

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In contrast to a whole life insurance policy, a decreasing term insurance policy only provides a death payout and no savings. Hence, the premiums are low compared to other forms of insurance that provide similar coverage.

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