If you have an obligation which decreases over time, it might seem like a declining term life insurance product might be the perfect solution. The death benefit would decrease in line with the obligation, so you’re never over paying, right?
Unfortunately, it’s not this straight forward.
These types of products do exist, yet they are rarely the best solution available. Because of the evolution of term life insurance over the years, these products are more or less phased out.
Some banks still offer them, but before you buy, here’s what you’ll need to know.
Declining Term Life Insurance
A declining term life insurance policy is a life insurance contract where the death benefit amount decreases over a certain duration, usually at a pre-determined rate.
For example, the coverage amount might start at $100,000 and decrease to $0 over a 20 year period. The amount of coverage might decline at a fixed 1/240th of the face amount each month. It could also match a loan principal amount, decreasing at a slightly increasing percentage the further along through the policy you are.
The most common declining term life insurance would be mortgage insurance purchased through a bank or other institution. While this type of insurance is still being sold, it’s much less prominent than it used to be.
Declining term life insurance sounds good, but because of how basic term life insurance policies have changed over the years, they just aren’t as practical. A good term life insurance policy would not only provide the insured with better coverage, but could even be cheaper than the declining term life insurance.
Drawbacks of Declining Term Life Insurance
If you look at how a mortgage life insurance contract works, for example, it’s a death benefit which keeps pace with the remaining principal remaining on the amortized loan. The plea by the issuer is a lower premium because the coverage amount is lowering. It makes sense, but for whose benefit is this type of policy?
The mortgage insurance will only benefit the bank in this situation, because it only helps them to recover the loan amount. This is the sole purpose of the insurance, and the beneficiaries of the deceased are left out of the equation.
Contrast this with a standard issue term life insurance policy and you have an entirely different situation. The beneficiary is declared by the insured, and the money is disbursed as such. While paying off the loan to the bank may be the intention, the beneficiary also has the option to continue to make mortgage payments, while keeping the remaining cash from the policy liquid. If nothing else, it buys time to make decisions.
The declining term life insurance also will only pay back the remaining loan amount, where the standard issue policy will pay the full amount it started at. Assuming someone had paid half their loan down before passing, the loan could be paid off completely and the beneficiaries could keep the other half for whatever needs or wants they had.
Best of all, because of the evolution in products and high competition in the term life insurance market place, a standard issue term policy for the same amount and duration as a declining term life insurance policy might even be cheaper!
How To Save Even More
If you really don’t care to do anything but pay back the loan and you want to save as much premium as possible, there is another strategy you can employ to help you do so.
Buy a term life insurance policy to match the loan duration and amount. But instead of paying the premium to maturity, simply call every year to lower your face amount to whatever the remaining principal amount is! Your premium will also go down by a proportional amount. You’ll not only satisfy the need for a declining term life insurance policy, but you’ll have a declining premium to pay!
What other bills get lower as you you pay further in?!
If you are looking at purchasing a declining term life insurance to satisfy a loan requirement or another need, contact us today and we can custom build you a plan which will perform in the identical way, yet save you much more premium over the life of the loan! As long as you can qualify medically, there’s a great chance you’ll be able to save! If you don’t think you would qualify due to health conditions such as someone needing life insurance for obese individuals, there are million dollar no exam life policies that may be a better option for your needs.