Decreasing Life Insurance

In this article...
  • Decreasing life insurance is a renewable product that comes with death benefit coverage that shrinks at a predetermined rate throughout the policy term.

Decreasing life insurance is a term life insurance policy with death benefit coverage that is reduced at a predetermined rate throughout the plan’s contract. Decreasing life insurance terms range from 1 to 30 years, depending on the insurer and the plans they offer. Decreasing life insurance policies are less expensive than traditional term or whole life policies and are often purchased as a way to provide personal asset protection.

The size of the policy decreases over a period of time and is designed to cover a loan or other financial obligations where the balance is paid down. Your decreasing life insurance policy may have a high enough death benefit to pay off your mortgage so that your family can remain in the home in the event you pass away unexpectedly. The policy is structured to decrease as you pay off the outstanding loan balance. 

How Decreasing Life Insurance Works

Unlike traditional term or whole life insurance, where the policy has a face value that remains constant over a long period of time, the decreasing life insurance policy has a death benefit that decreases monthly or annually. For example, a policyholder buys a 25-year decreasing term life insurance policy with a face value of $250,000.

If they died during the first year of coverage, their beneficiaries would receive the entire $250,000 death benefit. If the plan is structured to reduce by 5% per year, the death benefit would be $237,500 during year two (a total reduction of $12,500). This amount continues to shrink annually until either the policy pays out or after 25 years when the policy’s term concludes. 

The Cost of Decreasing Life Insurance 

While the amount of decreasing life insurance death benefit shrinks each year over the duration of the policy — typically 25 to 30 years — you pay the same monthly or annual premiums. How often your death benefit is readjusted is predetermined when you buy the policy. For example, your decreases might correspond with a mortgage, one of the largest financial obligations most people hold. You could decrease your payout by $50,000 to $100,000 every 5 to 7 years, depending on your plan and insurer. 

A low-risk, healthy 30-year-old policyholder may pay $35 a month for a 15-year $250,000 decreasing life insurance policy, customized to parallel their outstanding debts. The premiums don’t change, but as the policyholder ages, the benefits go down. A similar term or whole life insurance policy with $100,000 coverage that does not have a decreasing death benefit may cost $75 to $100 per month.  

Why People Buy Decreasing Life Insurance

Life insurance is designed to help your beneficiaries pay for your funeral costs and after-death expenses. Decreasing life insurance can be a great tool for peace of mind if it's structured correctly. You can structure your decreasing life insurance policy benefit to match outstanding debts: 

  • Mortgage
  • Auto loans
  • School loans
  • Personal loans
  • Business loans and obligations