The Definition of a Decreasing Term Life Insurance Policy
A decreasing term life insurance policy is one of three term life plans available for purchase, with level and increasing term being the other two. Term life policies provide insurance coverage for a specific period and pay death benefits if the insured dies during that time frame. However, the benefit amount of a decreasing term life plan is reduced steadily over the life of the policy until the coverage expires.
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Why Purchase Decreasing Term Life Insurance Policies
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Individuals purchase decreasing term life policies to cover specific temporary situations or obligations that don't last permanently. For example, decreasing term life policies are typically bought to cover a mortgage or car debt. As the debts dwindle, the value of the policy death benefit is also lowered. Once the financial obligations are paid off, the policy face value is reduced to zero and the coverage is terminated.
Features
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Decreasing term life policies are considered 'pure' insurance plans because they provide policy owners with insurance coverage only. This is in contrast to permanent life insurance policies such as whole life and universal life, which have savings and investment options. Decreasing term life policies can also provide coverage for different lengths of time, such as 5, 10, 15, 30 years or longer.
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Considerations
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Insurers consider many factors when deciding to grant or deny coverage to applicants. These include age, gender, occupation, benefit amount, hobbies, health and medical history. Applicants who request high death benefits or are older face a higher degree of medical evaluation.Those who are deemed higher risks pay higher premiums or, in some cases, are denied coverage.
Policy Renewal
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Decreasing term life policies can be extended for additional years if they have renewal clauses. This clause allows policy owners to renew their insurance coverage without providing evidence of insurability. Insurers designate specific periods (renewal periods) for changes to be executed. The renewal period is generally 30 to 60 days before policies expire.
Warning
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Policy owners pay higher premiums when they renew their decreasing term life insurance policies because they are older. Also if policy owners request an increase in their death benefits when renewing, insurers will request that the insureds provide proof of insurability. Insurance companies will also ask for medical information if policies are being extended outside of the renewal period. The main disadvantage of this type of insurance coverage is that while the death benefit decreases in value, the premium amounts will remain unchanged throughout the life of the policy.
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