What Is Decreasing Term Insurance?

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Decreasing term insurance is one of the simplest forms of life insurance available. Learn about decreasing term insurance with help from an assistant professor of insurance at The American College in this free video clip.

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Video Transcript

Hello, I'm Kevin Lynch, assistant professor of insurance at The American College in Bryn Mawr, Pennsylvania. Right 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 it's name term, it means that a policy issued that will cover a person for a specific period of time. As an example, let's say, that you purchase a one hundred thousand dollar term insurance policy. The one hundred thousand dollars is called the face amount. And what happens with this policy is, that if I, I'm the insured person, and you are my beneficiary. If I die at any time within the 365 days of the one year term of this policy. The beneficiary would collect the face amount. However, on the 366th day, the policy would cease to exist, unless it were 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, five years, 10 years, 15 years, 20 years, as long as 30 years. And 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 insurance is now. As an example, you buy a home, you get a 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 purchase 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 at the amount that the house owed, 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. Now, you may ask yourself, why would I want decreasing term 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 it 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, is 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. I'm Kevin Lynch with The American College in Bryn Mawr, Pennsylvania. For more information, go to www. TheAmericanCollege,edu. We've talked about decreasing term insurance, thank you.


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