Decreasing Term Life Insurance: Insider's Tips to Save Money
If you need life insurance to cover a diminishing debt like a mortgage, small business loan, or divorce decree; this strategy could save you a considerable amount of money.
A decreasing life insurance policy can also prevent you from being over-insured.
This insider's guide provides a brief overview of decreasing term life insurance coverage and the benefits it provides. We've also included a real-life example to illustrate the potential savings this strategy can offer.
Quick Article Guide
Here’s what we'll cover in this post:
- Decreasing the Face Amount of Your Life Insurance Policy
- Advantages of a Decreasing Term Life Insurance Policy
- A Real Life Example of a Client We Have Helped
- Actual Rates for a Decreasing Term Life Insurance Policy
- When Does it Make Sense to Buy a Decreasing Term Policy?
- How JRC Can Help You Select the Best Option Available
Decreasing the Face Amount of Your Life Insurance Policy
Some insurance companies offer traditional term life insurance with a death benefit that can decreased. With these policies, the insured has an option to adjust their coverage as they get older. Reducing the amount of coverage you carry will also reduce the cost of your policy.
If you decide not decrease your coverage, your policy's rates will remain level, regardless of your health or age. Once you lock in a term life insurance policy, your rate class and the cost of your coverage remain fixed for the entire duration of your term.
Purchasing a term policy with a decreasing death benefit provides flexibility to the insured, especially if they are on a fixed income. This strategy is also less-expensive than buying a new policy as you age and your need for life insurance protection declines.
Here’s how decreasing term life insurance works:
The first step is determining your current coverage needs. To do this, you'll want to consider the amount of years that your life insurance needs to cover. For example, if your business loan is for 15 years, you'll want to select a 15-year term to match or exceed your financial obligation(s).
You'll also need to purchase a policy with a death benefit that's large enough to settle your debt. As your loan balance decreases overtime, you can reduce your life insurance coverage to match your outstanding loan balance. This eliminates the need for a collateral assignment and prevents over-insurance.
It's also important to note that only a handful of top-rated insurance companies offer policies with a decreasing death benefit. This is why is so it's important to work with an independent agent that represents at least few dozen providers.
Advantages of a Decreasing Term Life Insurance Policy
The most valuable benefit of a decreasing term life insurance policy is flexibility. Having an ability to decrease your coverage can save money as your financial obligations decline. It also provides a safety net to adjust your coverage if your entire policy no longer fits into the budget when you retire.
Another benefit that term life insurance offers is fixed premiums. Once you've locked in your policy, your “risk class” cannot change, even if your health takes a turn for the worse. Your rates are also based on the age you were in when you originally purchased your policy.
For example: Let's say you purchased a $500,000 policy at "preferred" rates when you were 50. If you decide to decrease your coverage to $350,000 four years later, your insurance premiums will still be the same as a $350,000 policy for a 50 year-old in “preferred” health.With some life insurance companies, decreasing your coverage is as easy as making a phone call and signing a form. However, as we mentioned earlier, most life insurance companies do not offer this option. In addition, a handful of providers only allow you to decrease your policy's face amount once.
In addition to these carrier-specific limitations, the vast majority of life insurance companies have a waiting period of up to three years before they'll allow you to adjust your coverage. Many providers also require a minimum death benefit of $100,000.
These variables can make it difficult to find the best policy for your needs, especially if your agent only represents a few insurers. At JRC we work with more than 50 top-rated providers to make sure our client's are always matched with their best option.
A Real Life Example of a Client We Have Helped
Just last year we worked with a 54 year-old client named John. He was going through a divorce and the court had ordered him to buy a life insurance policy. Under the terms of the divorce decree, John needed $600,000 of life insurance, or enough coverage to support his ex-spouse for ten years.
John has very little debt and no dependents. As each year passes, the amount of support that he'll owe to his ex-wife will decrease by $60,000. With no real need for coverage (aside from the divorce decree), John was a perfect candidate for a policy that would allow him to reduce his coverage each year.
As a cigarette user, John’s rates we're two to three times higher than a non-smoker, so he wanted to save as much as possible. By being able to reduce his coverage amount each year, John will save about 40% on the cost of his life insurance over the next ten years.
Having the option to decrease his coverage allowed John to stay in compliance with the court without overspending. Each year his life insurance premiums will continue to decrease until his divorce decree is settled.The company we recommended for John was MetLife which also known as Brighthouse Financial. They are rated A+ (Superior) by AM Best and were founded more than 150 years ago in 1868. John's policy allows him to reduce the amount of coverage he carries each year, if needed.
Below are the actual rates for John’s life insurance policy as a cigarette smoker. Please note: if you use tobacco, but do not smoke cigarettes, you may qualify for a non-tobacco rate from a company like Prudential. To learn more please see our article for tobacco users here.
Actual Rates for a Decreasing Term Life Insurance Policy
If for any reason John does not reduce his coverage each year, the total cost for his policy over ten years would be approximately $39,720. By reducing the face amount of his policy, John’s total cost to fulfill the life insurance obligation of his divorce decree is $23,424,
By decreasing his term life insurance policy's face amount each year, John will save more than $16,000 on the cost of his coverage. It’s also important to note that if John was not a cigarette smoker, his rates would be at least 65% to 75% less than the rates displayed above.
If you are considered to be a "high-risk" for life insurance, a decreasing term policy can be especially beneficial. The following table illustrates the cost of an identical term life insurance policy for a non-smoker.
If should be noted that if John didn’t smoke and was in comparable health, he would have saved approximately $4,116 on his life insurance. If you have a few health issues, or if you use tobacco, decreasing term life insurance coverage may be even more advantageous than if you are in excellent health.
When Does it Make Sense to Buy a Decreasing Term Policy?
Decreasing term life insurance policies are ideal for insuring SBA loans, business loans, and diminishing debts like a mortgage or divorce decree. A decreasing term life insurance policy could also provide and emergency source if it is purchased by the family’s primary breadwinner.
On the other hand, decreasing the amount of life insurance coverage may not be ideal for everyone. If you have dependents that rely on you for income, and your life insurance policy is affordable, you might consider a collateral assignment instead. With a collateral assignment, any life insurance coverage that exceeds your current debt can be relocated to whomever you decide.It’s important to note that you are not required to reduce the death benefit your policy carries, but it’s nice to have this option. Especially if you're thinking about decreasing your coverage in the future. If someone depends on you financially, you can also allocate your extra coverage to them with a collateral assignment.
This person can be a child, spouse, business partner, or any family member with an insurable interest. Setting up a collateral assignment is as easy as signing a form and mailing it to your insurance company. Your agent can also help you when you initially purchase your policy.
Here's an example: Let’s assume you initially purchased a $400,000 life insurance to protect your mortgage. As you make payments on your loan, the amount of life insurance you carry will start to exceed your balance. This excess coverage can be collaterally assigned to your spouse or children.Remember, if you decide not to reduce your coverage, you are not obligated to do so, but having the option to do so may be invaluable in the future. If your financial situation changes, or if you retire on a fixed income, having the ability to reduce your policy for affordability may prevent you from losing coverage altogether.
Just keep in mind that some life insurance policies do not offer the option to reduce coverage. As an example insurance giant AIG does not offer policy reductions. So if your need for coverage changes, and you own one of their term policies, you could be over-insured.
This is common scenario for people that experience financial situation changes when they retire. In some extreme situations, some people are even forced to let their life insurance policy lapse.
In general, the life insurance providers that tend to be more lenient with face amount reductions include Prudential, MetLife/Metropolitan Life Insurance, Protective Life, and Lincoln Financial Group.
However, it’s important to note that each of these companies have different underwriting guidelines and one company may be a better match for you based on your individual health profile. This is why it always pays to work with an independent agency.
How JRC Can Help You Select the Best Option Available
As we mentioned earlier, some life companies do not allow policy reductions and others have stringent guidelines for adjusting your coverage. Our agency works with over 50 top-rated life insurance companies to make sure our clients are always matched with the best company available.
With a few questions, we’ll be able to determine which companies can offer you the best rates for the type of policy you need. Most importantly, our agents are not pushy salespeople, we’re here to help, and our non-partial shopping services are always free.
Give us a call today, toll-free at 855-247-9555 or you can request a free quote online using our free quote calculator below. In just a few seconds you’ll receive side by side quotes comparing quotes from dozens of highly-rated life insurance carriers.
Managing Partner and Co-founder
Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.