Should You Buy Decreasing or Level Term Life Insurance?

Do you have life insurance? Many adults only buy it after they have kids so the kids will be supported if a parent passes. However, buying life insurance is a responsible decision for each partner in a relationship, even if they don’t have kids. Once you decide to buy life insurance, you will need to choose if you should buy decreasing or level term life insurance.

Why Not Whole Life Insurance?

You can also choose whole life insurance, but most people don’t need that. Term life insurance should meet your needs and is more affordable.

Should You Buy Decreasing or Level Term Life Insurance?

Level term life insurance is more well-known, but there are some situations when decreasing term life insurance makes more sense.

When to Buy Level Term Life Insurance

If you choose level term life insurance, you are buying a policy for a certain number of years. For instance, you may choose a $500,000 or $750,000 (or more) policy for 20 years. If you die during those 20 years the policy is in effect, your beneficiary will receive your full life insurance payout.

Level term life insurance is a good option if you want to be certain your partner will be financially supported should you pass. Depending on the size of the policy, your partner could invest the money and use the interest to help support her income. She could also use the money to pay off any outstanding debts, including the mortgage, and invest the rest.

My husband and I decided on level term life insurance. At various times during our marriage, one of us was working full-time, and one was working part-time, so we wanted to make sure we were each protected regardless.

When to Buy Decreasing Term Life Insurance

Decreasing term life insurance is not paid out at a flat rate like level term life insurance. Rather, each year the policy exists, a little less is paid out. So, if you die the first year you have the policy, your beneficiary will receive more money than if you die in year 18 of the policy.

Usually, people choose decreasing term life insurance if they plan to use the money to pay off one large asset such as a mortgage. This type of coverage makes sense if you have enough in savings and investments for one spouse to live on, but you want to eliminate a big expense like the mortgage. Ideally, over the years, the balance on your mortgage will go down.  Therefore, you will need less life insurance money to pay it off. One benefit of decreasing term life insurance is that the premium is lower than level term life insurance.

Risks with Decreasing Term Life Insurance

Decreasing term life insurance is not without risks. For instance, maybe you have a medical crisis and need to use a cash-out refinance on your home to pay your medical expenses. If you die and your spouse receives your decreasing term life insurance benefit, that amount is based on your mortgage before you refinanced. It will no longer be enough to pay off the mortgage.

Or, let’s say you and your spouse are in a car accident. Your spouse dies, but you are left with a permanent disability and can no longer hold your job. You would only receive your spouse’s decreasing term life insurance, which isn’t enough to help provide financial support.

Which Type to Choose?

Decreasing term life insurance policies have cheaper premiums. However, level term life insurance offers more safety and protection for you and your partner.

Final Thoughts

If you haven’t yet gotten life insurance, there is no time like the present. To be certain you adequately protect your partner in the event of your death, consider buying level term life insurance rather than decreasing life insurance, even though the monthly premium is higher.

Read More

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