Decreasing Term Life Insurance: Insider’s Tips to Save Money

At JRC Insurance Group, we often receive calls from clients who want to purchase a decreasing amount of term life insurance.

Purchasing decreasing life insurance coverage can save you a considerable amount of money on your policy and may be ideal for someone with decreasing debts like a mortgage, small business loan, or a divorce decree.

Every life insurance company has different rules regarding how often you are able to decrease your coverage, and some companies are more flexible than others. In this article we’ll explain the ins and outs of decreasing term life insurance and we’ll also provide actual rates from clients we’ve helped.

Quick Article Guide:

  1. Decreasing the Face Amount of Your Life Insurance Policy
  2. A Real Life Example of a Client We Have Helped
  3. Actual Rates for a Decreasing Term Life Insurance Policy
  4. When Does it Make Sense to Buy a Decreasing Term Policy?
  5. How JRC Can Help You Select the Best Option Available

Decreasing the Face Amount of Your Life Insurance Policy

The greatest benefit to decreasing your term life coverage is the fact that your rates are locked based on the day you bought your policy, regardless of any changes to your age or health. This is because once you purchase a term life insurance policy, your approved rate class and age of purchase is set for the entire duration of your policy. For this reason, decreasing your term life insurance policy is almost always less expensive than buying a new policy.

Here’s how decreasing term life insurance works:

If you decide to decrease your policy’s face value, the price of your coverage is determined solely by your “risk class” at the time you purchased your policy, even if your health has changed. In addition, your rates are determined by the age you were when you originally purchased your policy, not your age today.

For example, let’s say you purchased a $500,000 policy at the age of 50 and were approved with a “preferred” rate class. If you decide four years later at the age of 54 that you want to decrease your coverage to $350,000, the cost of your insurance will be the same amount you would have paid for a $350,000 policy at age 50 in “preferred” health.

With some life insurance companies, decreasing the face amount of a life policy can be as easy as making a phone call and signing a form. However, not all insurance companies allow a policyholder to decrease the amount of coverage they carry. Some life insurance companies will only allow you to decrease the face amount of your policy once, while others may prohibit you from decreasing your policy until you have had the policy for at least three years.

In addition to these carrier specific limitations, the vast majority of life insurance companies will not allow you to decrease your policy’s face amount, which is also known as the death benefit, to less than $100,000.

Below is an example of an actual client that JRC has helped.

A Real Life Example of a Client We Have Helped

Just last year JRC worked with a 54 year-old client named John who was from New Jersey and was going through a divorce. As a stipulation, John was ordered by the court to buy a life insurance policy for his ex-wife. Under the terms of their divorce decree, John was initially required to carry $600,000 of life insurance coverage, or enough to support his ex-spouse for ten years. As each year passes by, the amount of support that John needs to pay to his ex-wife will decrease by $60,000, allowing John to reduce his life insurance coverage by $60,000 annually.

While John has no children or major debts, aside from the divorce decree, he didn’t have a pressing need for life insurance coverage. Although John was a smoker and was in a bit of a unique situation, the best policy for him was one that allowed an annual reduction to his death benefit. Having the option to decrease his coverage would allow John to reduce the cost of his life insurance each year as the financial requirements for the divorce decree diminished. As a cigarette user, John’s cost of insurance was very expensive and in fact, his policy would cost two to three times more than a non-smoker in comparable health. By being able to reduce his coverage amount each year, John will be saving a considerable amount of money.

The company we recommended for John was MetLife, an A+ (Superior) rated life insurance company that was founded in 1868. MetLife allows the insurance policy holder to reduce the amount of coverage they carry 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. 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, which means John will save more than $16,000 on the cost of his life insurance over ten years. It’s also important to note that if John was not a cigarette smoker, his rates would be about 65% to 75% less than the rates displayed above.

To understand the amount of savings, below are the rates for an identical amount of coverage if John was a non-smoker in comparable health.

If should be noted that if John didn’t smoke and was in good health, he would have saved approximately $4,116 on the cost of his life insurance. If you have a few health issues, or if you use tobacco, decreasing term life insurance coverage may be 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 a SBA loan or a business loan, insuring decreasing or diminishing debts like a mortgage, or to settle a divorce decree. In addition, decreasing term life insurance protection may be ideal for income replacement if purchased by the family’s primary breadwinner.

On the other hand, decreasing the amount of life insurance coverage may not be ideal for everyone. For instance, if you have dependents that rely on you for income, you may want to consider a collateral assignment instead, assuming your life insurance policy is affordable. With a collateral assignment, any life insurance coverage that exceeds the debt your policy was intended to insure is reallocated to a beneficiary of your choice.

It’s important to note that you are not required to reduce the amount of coverage your policy carries, although it’s nice to have this option in your back pocket if you think you may want to reduce your coverage in the future. With a collateral assignment, you also have an option of allocating the excess insurance coverage to a beneficiary of your choice like a child, spouse, business partner, or another family member. 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 set up collateral assignment when you initially purchase your policy.

As an example, let’s assume you purchased life insurance to protect your mortgage. As you pay down your mortgage each month, the amount of life insurance coverage you need will decrease as well. Since you will no longer need as much coverage to protect your house, the amount of your life insurance policy that exceeds your mortgage’s balance 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 and have 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, let’s consider the well-known life insurance company AIG, or American General.  AIG does not allow reductions to term life policies so if a need for coverage changes and you own one of their policies, you may be grossly over-insured. This is all too common for people who enter retirement and their financial situation changes. Often these clients are unable to afford their premiums and they are forced to let their policy lapse.

Companies 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 some companies have very stringent guidelines for adjusting your coverage amount. At JRC we work with over 40 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.

Our agents are not pushy salespeople, we’re here to help, and our services are free. Give us a call today, toll-free at 855-247-9555 or request a free quote online here. In just a few seconds you’ll receive actual quotes from dozens of highly-rated life insurance carriers.

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Cliff Pendell

VP of Marketing at JRC Insurance Group
Cliff is a Managing Partner and Co-Founder at JRC. 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.
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