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The Declining term life insurance option

Does it make sense as a type of term?

There are all types of term life insurance on the market and one of the various flavors is declining term life.  It's not nearly as common as level term life (the heavy weight on the market) but it is available and typically for a lower rate when comparing apples and apples (term benefit, etc).  Let's take a quick look at declining term life and size it up versus level term.

First, what is declining term life?  Essentially, it's a payout option where the life insurance benefit decreases during the life of the policy.  For example, with 15 years of total term length, the life benefit may be $500K in the first 5 years, then $250K if triggered in the next 5 years, and finally...$100K if triggered in the final 5 years of the 15 year policy.  In a nutshell, this is declining term life.  Why would anyone go this direction?  

Price.  Declining term life insurance will be less expensive than Level term and it's obvious why...the benefit is decreasing with time.  With level term life, the $500K benefit (or whatever amount you select up front) stays the same for the full duration of the policy .  Whether it's year 1 or year 15, the benefit is $500K if the insured passes away.  To some extent, to make a fair comparison, the above example of  $500K/$250K/$100K is probably more akin to $250K of benefit if we want to price it out.  Also keep in mind that on average, the chance of passing away increases as we get older.  Accidents may happen any time but diseases that affect mortality (cancer, heart attacks, etc) occur at a higher frequency as we get older.  To some extent, the carrier is reducing it's risk with such a declining benefit set-up.  So what's our take on declining term life insurance?

So often with insurance in general (be it life, health, or others), people like to play fortune teller.  It's interesting since risk is risk regardless of what shape it comes in.  It's similar to someone taking health insurance and opting out of chemo/radiation therapy to reduce the rate.  The savings may be big but you gambling that you won't need these services.  This is only a step away from gambling that you will not need health insurance at all.  We're all familiar with someone who went without health insurance and had a huge medical bill that financially wiped them out.  Life insurance is no different.  To gamble that you will be less likely to trigger the benefit in the last 5 years than the first is counter-intuitive and the life insurance companies love taking this bet (since they know better). 

Maybe there's a rationalization such as "Well, my mortgage debt is decreasing with time so I can match the term life insurance benefit to that fact".  The actual debt (as opposed to equity) is decreasing but the monthly payment is the same.  Keep in mind that life insurance is generally used to replace income over a period of time.  It's hard to believe that income in year 11-15 will be any less needed than in 1-5.  If anything, most people will agree that financial responsibilities only increase with time...especially for a family with children that will one day go off to college (translated as expensive). 

Our recommendation is to not play a guessing game for the trade-off of lower rates.  If you guess wrong, you're loved ones suffer as a result.  It makes more sense to purchase level term life insurance that fits within your budget.  There may be situations where a person truly has a decreasing financial responsibility for which, the decreasing term life payment option might fit, but this is usually in addition to a traditional term life policy used for general protection of your family.

 

 

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