Life insurance is, in many ways, a game of strategy. It’s not just a matter of simply finding the best rate—you want to find the best coverage for you, at a rate within your budget. Each person has their own unique situation, which is why you should work with a life insurance agent who can advise you on different carriers and plans. One option you might come across while shopping around is a decreasing term life insurance policy. In this article, we’ll help you understand this coverage, and then offer a better solution to the need it’s meant to serve.
What is Term Life Insurance?
Term life is a type of life insurance that ensures a death benefit (money paid to your spouse or heirs to cover income loss and assets in the event of your death) with a fixed premium, for a set period of time (your term). It is the affordable counterpart to whole life insurance, which provides permanent coverage for life.
Many people seek term life insurance as a means to instant peace of mind, whether for general income purposes or to cover a major expense that they would not want to leave behind for their family to take on (such as a mortgage). Terms are generally available in 5-year increments ranging from 5 to 30 years, after which the policy will usually become renewable on an annual basis.
What is Decreasing Term Life Insurance?
Decreasing term life insurance provides a death benefit that gradually decreases—either monthly or annually—over the span of the policy. The idea is that as you age, you will pay down your debts and your liabilities will decrease; therefore, your family will require less of a payout to overcome any burden of debt you might leave behind. Decreasing term life insurance is commonly used as targeted coverage for one of the following debts:
- Personal loan
- Auto loan
- Business loan
Drawbacks of Decreasing Term Life While a decreasing term life policy does effectively cover a mortgage by aligning the death benefit with the life of the loan, it doesn’t quite work for other types of loans. Here’s why:
- You pay the same monthly premium for a decreasing payout
- There are very limited carriers, as decreasing term life is somewhat of an outdated product
- The premiums can be exorbitant
- The beneficiary is actually the creditor, not your loved ones
Alternative: Term Layering (or Term Laddering) With the notable drawbacks of decreasing term life insurance, there’s a different strategy you should consider: term layering (also called term laddering). Ideally, the older you get, the more “self-insured” you become. When you retire, the goal is to have paid off all of your debts so you can leave a legacy to your family. Term layering enables you to stack two or more term life insurance policies to achieve the same effect as decreasing term life. If you’re in your 30s and 40s, your biggest vulnerability is your children.
You want to ensure that your debts are backed by life insurance, at least until they reach adulthood. For example, let’s say Bob is 35 years old and married with two children, ages 2 and 5. For the next 20 years, Bob will want to have the most coverage possible until the kids are grown and able to take care of themselves. He has a 30-year mortgage, so a 20-year term policy would leave a 10-year lapse in mortgage protection. At the same time, he also doesn’t need maximum coverage for a full 30-year term, because after 20 years, his children will hopefully be self-sufficient and he’ll need less life insurance.
To meet both of his needs, Bob buys two term life insurance policies, one for 20 years, and one for 30 years, each with a $500,000 death benefit. This also allows him to lock in 30 years of coverage while he is in good health and able to get preferred rates. After Bob’s 20-year policy expires, he will shed that policy’s monthly premium while still having the 30-year policy to mirror the mortgage. When the 30-year policy expires, he can renew his policy, convert it to a permanent policy, or buy a new policy altogether, based on his needs.
Work with an Independent Agent
Term layering isn’t overly complicated, but there are a lot of factors that come into play, and you might even find yourself layering more than two policies for various purposes. To ensure that you get the right coverage and arrange your policies correctly, you should work with an independent life insurance agent that can shop multiple carriers for the best rates and products.