Decreasing term life insurance, which is sometimes referred to as mortgage protection insurance, is a type of life insurance in which the death benefit amount decreases over the term of the policy - which usually coincides with the mortgage loan term.
Let's say you die 15 years into the 20 year term, if you had a decreasing policy, the remaining mortgage would get paid, and your spouse would get zero dollars. If you had a term policy, your spouse would take the $300,000 pay the remaining mortgage - i.e. $50,000 - and she would have $250,000 tax free left over.
WHAT IS THE BETTER DEAL? Obviously, the term life policy.
For example, if you are married with two children, and you have a $300,000 mortgage for 20 years, you should get a 20-year term life insurance policy in the amount of three hundred thousand dollars which names your spouse as the beneficiary. In case of your death, your spouse can pay off the mortgage, and your family does not lose the home.
Furthermore, you could take a life insurance policy greater than the mortgage amount, this way your family will have money left over for other things like, college education, other debts, etc, if you die shortly after getting the policy.
How Decreasing Term Life Insurance Works
Decreasing life insurance goes down in value every year because the amount of money owed on the mortgage or other debt also goes down each year. Therefore, there is no need for the life insurance policy to pay out as large of an amount as it would have at an earlier point in the life of the loan.
Why People Purchase It
Most people that choose to purchase decreasing term life insurance do so in order to protect the repayment of their mortgage if they were to die before the mortgage is paid off. Although it is typically associated with helping to pay off a mortgage, however, decreasing term life insurance may also be taken out in order to guard against paying other large debts such as school fees and other loans.
The premiums of a decreasing life insurance policy are usually fixed throughout the life of the policy despite the fact that the value of the policy goes down each month or year. In addition, unlike other types of life insurance, there is no surrender value to this type of policy. As a result, the premiums are generally lower than a level term life insurance policy. Nonetheless, it is important to look into the cost of different types of life insurance in order to determine which one is right for you and your personal situation.
For some, decreasing term life insurance is not the best choice. This is because it can cost quite a bit more than straight term life insurance. In addition, the fact that the value of the insurance goes down as the actual mortgage is paid off can make a decreasing term life insurance policy unattractive to homeowners that do not want to burden their families with mortgage payments in the event of their death.
For those that are simply interested in making sure their mortgage is paid off in the event of their death, however, a decreasing term life insurance policy can be ideal.
After all, the amount of money a typical family owes each year tends to go down as mortgage payments decrease. Most families begin to earn more money each year too. Therefore, the need for a life insurance policy that increases in payment amounts is unnecessary. For those that are concerned
about their ability to successfully pay off the mortgage, however, term life insurance can alleviate this concern.