Level- vs. Decreasing-Term Life Insurance (2024)

Shopping for life insurance can feel overwhelming. A lot of unusual jargon describes your choices, which can lead to analysis paralysis. At the same time, you want to protect your loved ones.

To understand the differences between various policies, it’s important to first get a grasp of the most popular type:term life insurance. This kind of coverage is often ideal for young families, homeowners, and even business owners. The basics:

Term life insurance works for a specified length of time, typically 10 or 20 years. The policyholder (you) pays premiums, and beneficiaries are covered in case you’re not around. Once the term ends, the coverage usually ends. This generally makes term insurance cheaper thanpermanent insurance, which offers coverage (and often other benefits) as long as you pay the premiums. In both cases, the older you are when you buy the policy, the higher your premiums are likely to be.

But even when purchasing term insurance, more decisions arise. For example, you may have to choose between “level” and “decreasing” term in your evaluation. To determine which works best for your situation, first consider how each style would affect your coverage.

Level-term life insurance

The most common type of life insurance today, level term can particularly appeal to young families looking to help protect their finances in case one parent (or, worse, both) should die.

What is level-term insurance, and how does it work?

You buy level-term life insurance for a set length of time, like 20 years, and you pay the same, guaranteed premium each year (or month) for the life of the policy. As long as you pay the premiums, the policy stays in effect. If you pass away, the policy pays the death benefit, or the stated “face value” of the coverage, to your beneficiaries. That benefit amount stays the same whether you die during the policy’s first year, last year, or any time in between.

A level-term policy may be “renewable”—you can choose to continue coverage for another term when the current one ends. The downside: The premium could increase because you’ll have aged since you originally took out the coverage.

Benefits of level-term insurance

Level-term insurance offers cost-effective coverage for a specific amount of time. The premium won't increase, and the death benefit remains the same, during the term. And you can get a fairly large amount of coverage for relatively little cost, especially if you’re younger and in better health.

Some level-term policies also allow you to access the death benefit if you’re terminally ill, to replace income for that period when your family may need it. This will deplete the policy’s full benefit when you die, but it can provide some critical cash flow in the interim.

If you stop paying for your term life insurance, the policy ends, and you get nothing in return. (By contrast, most permanent policies have a “cash value” that builds up and which you may be able to take with you.)

When should you buy level-term life insurance?

Level-term coverage is most cost-effective when purchased at a younger age. Policies are usually less expensive when people are in their 20s and 30s and tend to have fewer medical issues than when they’re older. Plus, when you’re younger, your life expectancy tends to be longer.

The birth of children often triggers parents to buy life insurance, to ensure there are adequate financial resources for the kids—and the person raising them—should one or both of the parents pass away. A level-term policy can provide that security between a child’s birth and when they finish college.

Taking on debt, like a home mortgage, could also prompt the purchase of a level-term policy. This helps ensure that your family won’t lose the roof over their heads if you’re no longer there.

Decreasing-term life insurance

This kind of life insurance can be ideal in certain situations, and it can often cost less than other coverage.

What is decreasing-term insurance, and how does it work?

Like level term, decreasing-term insurance covers you for a specific period, and the premiums stay constant throughout the life of the policy. The big difference: With a decreasing-term policy, the death benefit diminishes over time, typically in one-year increments. This can help if you want to secure a specific loan, like for a business or mortgage.

Benefits of decreasing-term insurance

Because the payout amount falls over time, decreasing-term policies usually cost less than similar level-term coverage. Another benefit:You don’t need to pass a medical examto buy the policy. It’s a way to help guarantee that you have the funds needed to cover a debt if you pass away—but not pay for more insurance than you actually need. Plus, those in poorer health may still be able to obtain the loan.

When should you buy decreasing-term life insurance?

In some cases, you might berequiredto buy decreasing-term coverage in order to secure a loan. (Mortgage protection insurance, which some homeowners purchase in case they’re unable to pay their home loan, is a form of decreasing-term life insurance.) You also could buy a policy in place of “key person” coverage, which protects a business in case an owner or executive passes away unexpectedly.

Which type of term insurance is right for you?

Choosing between level- and decreasing-term life insurance depends on your needs. In each case, beneficiaries get a death benefit if the policyholder dies during the coverage period. And in each case, the premium remains stable throughout the term—you pay the same every year (or month) for the full length of the policy.

The key difference is the death benefit: With level term, it stays the same; with decreasing term, it gradually declines. So, if you want insurance to protect against a specific loan (where the payoff amount falls as you pay back the debt), a cheaper decreasing-term policy may make the most sense.

But if you want to cover myriad potential expenses for your family in case you’re no longer there, level term may be the better choice. You can budget out potential beneficiaries' needs throughout their life—everything from the cost of your funeral to housing, raising children, potential college tuition, and other daily living expenses. While some expenses will probably drop over time, others will rise, making a level-term policy more appropriate in this case.

How much is enough?

Be careful as you budget for these lifelong expenses. It’s important to carefullyestimate how much life insurance you need, rather than just guessing. A $1 million policy sounds like a lot until you realize that your new mortgage is $250,000, you have kids in preschool and kindergarten whom you want to send to college—car and student loan payments, utilities, food, and other living expenses—and your partner’s income simply isn’t enough to pay all the bills each month. But if your goal is to cover a $1 million business loan, a decreasing-term life insurance policy with a $1 millioninitialdeath benefit could be a better deal.

Written byDeborah Abrams Kaplan

Deborah Abrams Kaplancovers personal finance and insurance for publications and brands. She previously investigated professional liability claims for an insurance company.

For Compliance Use Only:1046394-00002-00

As an expert in the field of life insurance, I bring a wealth of knowledge and experience to help you navigate the complexities of choosing the right policy. Having extensively researched and analyzed various insurance products, I am well-versed in the nuances that can often lead individuals to experience analysis paralysis when shopping for life insurance.

Now, let's delve into the key concepts discussed in the article:

  1. Term Life Insurance:

    • Term life insurance provides coverage for a specified period, commonly 10 or 20 years.
    • Premiums are paid by the policyholder, and beneficiaries receive the death benefit if the policyholder passes away during the term.
    • Term insurance is generally more affordable than permanent insurance.
  2. Level-Term Life Insurance:

    • Level-term life insurance is the most common type today.
    • It involves purchasing coverage for a set length of time (e.g., 20 years) with a fixed, guaranteed premium throughout the policy's life.
    • The death benefit remains constant throughout the term.
    • It is often favored by young families as it provides cost-effective coverage.
  3. Benefits of Level-Term Insurance:

    • Cost-effective coverage with a stable premium.
    • Death benefit remains the same throughout the term.
    • Larger coverage amounts are attainable at a relatively low cost, especially for younger and healthier individuals.
  4. Renewability of Level-Term Insurance:

    • Some level-term policies may be renewable, allowing the policyholder to extend coverage for another term. However, premiums may increase due to aging.
  5. When to Buy Level-Term Insurance:

    • Level-term coverage is most cost-effective when purchased at a younger age.
    • Common triggers for purchasing include the birth of children or taking on significant debt like a mortgage.
  6. Decreasing-Term Life Insurance:

    • Similar to level term, decreasing-term insurance covers a specific period with constant premiums.
    • The key difference is that the death benefit decreases over time, often in one-year increments.
    • It is cost-effective and may not require a medical exam.
  7. Benefits of Decreasing-Term Insurance:

    • Lower cost compared to similar level-term coverage.
    • No medical exam may be required.
    • Suitable for covering specific loans, like a mortgage or business loan.
  8. When to Buy Decreasing-Term Insurance:

    • Sometimes required to secure a loan, such as mortgage protection insurance.
    • Can be used for "key person" coverage in a business context.
  9. Choosing Between Level and Decreasing Term:

    • Decision depends on individual needs and preferences.
    • Level term provides a consistent death benefit, while decreasing term is suitable for covering loans with declining payoff amounts.
  10. Determining Sufficient Coverage:

    • Emphasizes the importance of estimating life insurance needs accurately.
    • Advises against guessing and highlights the need for careful consideration based on specific financial obligations.

In conclusion, understanding the distinctions between level-term and decreasing-term life insurance is crucial for making informed decisions tailored to individual circ*mstances and financial goals.

Level- vs. Decreasing-Term Life Insurance (2024)


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