What is Decreasing Term Insurance?

324 reads · Last updated: December 5, 2024

Decreasing term insurance is a type of renewable term life insurance with coverage decreasing over the life of the policy at a predetermined rate. Premiums are usually constant throughout the contract, and reductions in coverage typically occur monthly or annually. Terms range between 1 year and 30 years depending on the plan offered by the insurance company.Decreasing term life insurance is usually used to guarantee the remaining balance of an amortizing loan, such as a mortgage or business loan over time. It can be contrasted with level-premium term insurance.

Definition

Decreasing term insurance is a renewable term life insurance where the coverage amount decreases at a predetermined rate over the policy term. The premium typically remains constant throughout the contract period, while the coverage amount decreases monthly or annually.

Origin

The concept of decreasing term insurance originated in the mid-20th century, evolving with the increasing demand for loan repayment protection by individuals and businesses. It was initially designed to meet the needs of mortgage and other gradually repaid loans.

Categories and Features

Decreasing term insurance is mainly categorized into mortgage decreasing insurance and personal loan decreasing insurance. Mortgage decreasing insurance focuses on the reduction of mortgage balances, while personal loan decreasing insurance applies to other types of loans. Its main features include fixed premiums and decreasing coverage, making it suitable for repaying gradually reducing debts.

Case Studies

Case Study 1: A family purchases a 30-year mortgage decreasing insurance to cover their 30-year home loan. As they make monthly payments, the coverage amount decreases, ensuring that if the insured passes away before the loan is fully paid, the insurance can cover the remaining balance. Case Study 2: A small business buys decreasing term insurance for its 10-year business loan. As the business gradually repays the loan, the coverage amount decreases accordingly, reducing the business's insurance costs.

Common Issues

Common issues investors face include whether decreasing term insurance is suitable for all types of loans. Typically, this insurance is best suited for loans with a clear repayment plan, such as mortgages. Another common misconception is that premiums decrease as the coverage amount decreases, but in reality, premiums remain constant throughout the insurance period.

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