Index | Life Insurance | Increasing/Decreasing Term Insurance
Increasing/Decreasing Term Insurance
Among the regular varieties of Term Life Insurance there are two types under which the cost of the coverage either increases or decreases over the term period thus resulting in Increasing or Decreasing Term Insurance plans correspondingly.
With Increasing Term Insurance the benefit amount you are exposed to automatically increases each year of your term period. The increase is within a set limit, which is usually at least 2% up to the maximum of 10%. At the same time not only your benefits increase, so do the premium payments. The major principle underlying the setup of this plan is the following: the amount of the premium you pay directly correlates with the amount of the death benefit. So, in general, Increasing Term Insurance is not the best type of insurance for you if you are interested in long-term protection because increasing premiums reduce the value of the coverage. At a certain moment it may so happen that your premiums will increase at a higher rate than your benefits. This policy is, therefore, fraught with potential losses. And it is recommended to carefully estimate your needs and potential expenses to determine whether this type of insurance is for you.
Another option is Decreasing Term Insurance, sometimes referred to as Mortgage Protection Insurance. Decreasing Term Life Insurance is aimed at covering a very specific type of expenses - your debts (usually a mortgage or other amortized loans) when the amount owed decreases from year to year. The special feature of Decreasing Term Insurance, as the name implies, is that the sum of money the legitimate beneficiaries will receive upon the death of the insured decreases over the policy period. In the event of the insured's death the beneficiaries will receive only what is left on the policy, which depends on how the policy was set up when it was issued. Accordingly, the amount of the death benefit can be greater than or less than the rate in line with which the mortgage debt is reduced.
Under contracts of this type the premiums you are to pay to keep your policy in force remain level throughout the term. But they start with appreciably lower amounts than with Level Term or Increasing Term policies because the death benefit in the event of the insured's death is decreasing all the time. The amount of the premium will depend on the sum you are ready to ensure your life for, the period of coverage you select, your age and your habits (such as smoking).
As was mentioned above, Decreasing Term Insurance is usually used to cover a mortgage, a loan or any other type of debt. Therefore, it is generally purchased by people who have financial obligations that decrease over time. In fact, as you pay back what you owe, portion by portion, you are paying for less coverage to protect it and to be through with your debts, if you were to die. Therefore, Decreasing Term Insurance is aimed at preventing you from passing your debts onto your beneficiaries. In line with it, Decreasing Term Insurance will give you peace of mind that the death benefit will be paid out to your family, should the worst happen to you.
At the same time there are limitations inherent to this plan and alternatives to it you should be aware of. Thus, you should know that your policy will pay out only in the event of your death or if you are diagnosed with a qualifying critical illness. In the latter case you are expected to add on the special additional option. If you survive beyond the plan's term, you receive no reimbursement as the policies of this type have no maturity value.
Decreasing Term Insurance is very convenient for insuring a liability that is gradually being paid off. Thus, it is right for you if paying off your mortgage is your primary concern. All the other concerns we are often faced with, such as education, health care, retirement, may remain financial burdens for a long period of time, whereas mortgage payments get smaller and smaller each year. If you do not need to cover your mortgage or liabilities of the kind, then you do not need Decreasing Term Insurance. Other types of Term Life Insurance will be more suitable for you. For example, you can do pretty well with Level Term Insurance and receive a wide scope of benefits at the level premiums throughout the term period. One more argument generally put forward against Decreasing Term Insurance is that the value of this insurance goes down as you pay down your mortgage.
Both Increasing Term Insurance and Decreasing Term Insurance do not enjoy great popularity nowadays because the effect they bring is not always tangible. Thus you should consider the options and determine what suits you more. Keep in mind that the terms and conditions of policies vary and it is important to understand the scope of the coverage. It is essential to look into the costs and conditions of different types of Life Insurance to understand which one is right for you and your personal situation.