Life Insurance Learning Center - Term Life Insurance Types
Decreasing Term Life Insurance, Part 2
Arguments in favor of decreasing term life insurance are many. As the insured and family get older, odds are the amount of income the family needs to sustain itself will be far less than at the time the policy was purchased, and thus the lower death benefit will still provide adequate coverage. Bear in mind that this is not always the case; there can be a substantial age gap between the beneficiary and the insured (the beneficiary doesn't necessarily have to be the spouse). Furthermore, the family may have a higher standard of living than at the time the policy was purchased for a variety of reasons (inflation or otherwise), which forces the family to spend more. Therefore, their expendable income increases.
A conversion clause in a decreasing term life insurance policy allows the policy owner to exchange the existing coverage with a straight life or other cash value life insurance policy without any evidence of insurability. However, the death benefit, once the policy is converted, cannot exceed 80% of the amount of the decreasing term life insurance at the time of conversion.
This doesn't bode well for a person who falls very ill while on a decreasing term life insurance plan. If the person converts, the beneficiary automatically loses 1/5 of the current coverage under the existing plan. However, if the person doesn't convert, then the death benefit and the conversion rate will continue to drop.
Sometimes, decreasing term life insurance is offered as a rider provision, or as a separate policy. The coverage can masquerade under an alias, such as mortgage insurance or family income life insurance (see the Life Insurance Riders section).
Mortgage insurance is when the decreasing unpaid balance of the mortgage parallels with the decreasing term coverage under the amount of protection that is provided. These term life insurance policies can be either added as a rider to an existing basic policy, or taken out as a separate policy.
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