Definition
Decreasing term insurance is a type of renewable term life insurance where the coverage amount decreases over the life of the policy at a predetermined rate. While the premiums remain constant throughout the contract, the death benefit reduces according to a specific schedule, often coinciding with loan repayments such as mortgages. This insurance is primarily designed to ensure that outstanding debts are covered in the event of the policyholder’s untimely demise.
Comparison: Decreasing Term Insurance vs Level-Premium Term Insurance
| Feature | Decreasing Term Insurance | Level-Premium Term Insurance |
|---|---|---|
| Coverage Amount | Decreases over time | Stays constant |
| Premiums | Usually remains constant | Generally remains constant |
| Purpose | Often used for amortizing loans (e.g., mortgages) | Provides life cover for a fixed term without reduction |
| Cost | Generally less expensive | Usually more expensive |
| Renewability | Often renewable | Typically renewable |
Examples
- Application: A homeowner may purchase decreasing term insurance to coincide with their mortgage repayment schedule, ensuring that if something were to happen, the mortgage is paid off, protecting their family’s home.
Related Terms
- Life Insurance: A contract whereby an insurance company pays a designated beneficiary a sum of money upon the insured’s death.
- Term Life Insurance: Life insurance that provides coverage for a specific period (the term), typically 10 to 30 years.
Formulas and Charts
graph TD;
A[Decreasing Coverage] --> B[Year 1]
A --> C[Year 5]
A --> D[Year 10]
B --> E[Coverage Amount Drops]
C --> E
D --> E[With payments towards premiums]
Humorous Citations
“Decreasing term insurance: like your waistline during holiday season—great in the beginning, but it goes down just a little too quickly for comfort!” 😂
Fun Facts
- Did you know the concept of life insurance dates back to ancient Rome? They had “burial clubs” to help cover funeral costs. Talk about planning ahead!
Frequently Asked Questions
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What happens to the premiums as the coverage decreases? The premiums remain constant even as the coverage decreases, so you might think, “Why don’t I just buy a chocolate bar for the same amount? At least that won’t leave me exposed if I die before my next meal!” 🍫
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Is decreasing term insurance mandatory for loan approval? Many lenders may require it to ensure the loan is paid off in full if the borrower passes away, so saying, “Why do I need it?” will likely earn you a stern look from your bank officer. 💼
Suggested Resources
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Online Resources:
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Books for Further Studies:
- The Complete Guide to Life Insurance by William C. Adams
- Insurance for Dummies by Jack Hungelmann
Test Your Knowledge: Decreasing Term Insurance Quiz
Thank you for understanding decreasing term insurance! May your premiums remain constant and your coverage significantly valuable! Smile! 😊
