Introduction
Selecting the most suitable life insurance policy can be a challenging effort, particularly when confronted with a multitude of options. Term life insurance, which offers coverage for a predetermined duration, is one of the most prevalent types of life insurance. Within this category, one must decide between level-term and decreasing-term life insurance. Gaining a comprehensive understanding of the distinctions between these policies is crucial to making an informed decision that is in line with your financial goals and safeguards your family.
Background Information
Life insurance is a fundamental element of any comprehensive financial strategy, providing assurance and financial protection for loved ones in the event of your death. Term life insurance is a popular choice for its cost-effectiveness and simplicity. Unlike permanent life insurance, which offers coverage for the duration of your life, term life insurance provides coverage for a specific period, such as 10 or 20 years. If you pass away during the term, your beneficiaries will receive the death benefit. Should the term conclude without incident, coverage ceases, and there are no further benefits.
Level-term life insurance
Definition of level-term life insurance
Level-term life insurance is the most prevalent form of term insurance. It furnishes a steady premium and an unchanging death benefit over the policy term. For example, with a 20-year level-term policy featuring a $500,000 death benefit, your beneficiaries would receive $500,000 upon your passing within those 20 years.
How does it work?
- Fixed Premium: You pay a consistent, unchanging premium each year (or month) throughout the policy's term.
- Consistent Death Benefit: The death benefit remains the same, regardless of when you die during the coverage period.
- Renewable: Many level-term policies offer the option to renew for another term, though the premium may increase due to your age.
Benefits of level-term life insurance
- Cost-Effective: Level-term insurance is generally more affordable than permanent insurance, making it a practical choice for young families and individuals on a budget.
- Guaranteed Coverage: The policy remains in effect as long as you pay the premiums, providing a reliable financial safety net.
- Large Coverage Amounts: You can often secure a significant death benefit for a relatively low cost, especially if you're younger and in good health.
- Terminal Illness Benefit: Certain policies offer the option to access a portion of the death benefit if one is diagnosed with a terminal illness, providing immediate financial support.
When should we buy level-term life insurance?
- Young Families: Level-term coverage is ideal for new parents who want to ensure their children have financial resources for education, living expenses, and other needs.
- Homeowners: For those with a mortgage, a level-term policy is a sound way to safeguard your family from the loss of their home in the event of your passing.
- Business Owners: Level-term insurance offers a more comprehensive safeguard for both your family and your business, making it a versatile option.
Decreasing-term life insurance
What is decreasing-term life insurance?
Decreasing-term life insurance, often referred to as mortgage protection insurance, provides a consistent premium but a death benefit that diminishes over time. For example, a 20-year decreasing-term policy with an initial $500,000 death benefit could see that amount dwindle to $300,000 by the end of the term.
How does it work?
- Fixed Premium: The premium remains constant over the policy's duration.
- Declining Death Benefit: The death benefit decreases over time, usually in annual decrements.
- No Medical Exam: You may qualify for this type of policy without the need for a medical exam, making it accessible to those with health problems.
Benefits of decreasing-term life insurance
- Affordability: With the diminishing death benefit, decreasing-term policies are often more cost-effective than their level-term counterparts.
- Specific Debt Coverage: It is particularly useful for securing loans, such as a mortgage, where the payoff amount decreases over time.
- Accessibility: Those in poorer health may still be able to obtain coverage, as a medical exam is not always required.
When is decreasing-term life insurance a good idea?
- Mortgage Protection: To guarantee your family can meet the remaining mortgage balance in the event of your passing, a decreasing-term policy is a financially prudent choice.
- Business Loans: This type of policy can be used to cover specific business debts, which can help reduce the financial burden on your business or partners if you're no longer around.
- Required by Lenders: Some lenders may require decreasing-term life insurance as part of the loan agreement to ensure the debt is covered in the event of your death.
Which type of term insurance is right for you?
Choosing between level-term and decreasing-term life insurance depends on your specific financial needs and goals. Both types of policies offer fixed premiums, but the key difference is in the death benefit:
- Level-Term: The death benefit remains the same throughout the term, making it ideal for providing comprehensive financial protection for your family.
- Decreasing-Term: The death benefit decreases over time, making it more suitable for specific debts like mortgages or business loans.
How much coverage do you need?
It is important to accurately estimate the amount of life insurance coverage you need. For level-term policies, consider the following:
- Family Expenses: We can help you calculate the total cost of raising your children, including education, living expenses, and other financial obligations.
- Mortgage: Guarantee the death benefit matches your mortgage balance, securing your family's home.
- Debt: Consider any other significant debts, such as car loans or student loans, that your family would need to manage without your income.
For decreasing-term policies, focus on:
- Mortgage Balance: Determine the initial and final balance of your mortgage to find a policy that aligns with your needs.
- Business Debt: For those with business loans, a decreasing-term policy can provide the assurance that these debts are covered as they decrease.
- Loan Requirements: Verify the need for a designated decreasing-term life insurance policy with your lender.
Practical Examples
Level-term life insurance example
John and Mary, a young couple with two small children, decide to purchase a 20-year level-term life insurance policy with a $500,000 death benefit. They pay a fixed premium of $50 per month. If John passes away 10 years into the policy, his family will receive the full $500,000, helping them cover living expenses, education costs, and the mortgage.
Decreasing-term life insurance example
David, a business owner, secures a 15-year decreasing-term life insurance policy to protect a business loan. The initial death benefit is $300,000, which decreases by $10,000 each year. David pays a fixed premium of $30 per month. If he dies five years into the policy, his business partners will receive $250,000 to help pay off the remaining loan balance.
- Evaluate Your Needs: Consider your financial obligations and goals to determine which type of term insurance is best for you.
- Consult a Financial Professional: Speak with a financial advisor to help you make an informed decision and tailor a policy to your specific needs.
- Use Online Tools: Use our life insurance calculator and other online resources to help you estimate the right coverage amount.
Additional Resources
Conclusion
Life insurance is a critical tool for protecting your loved ones and ensuring financial stability in the event of your death. Whether you choose a level-term or decreasing-term policy, the key is to understand your specific needs and select a policy that provides the right level of coverage. By taking the time to evaluate your options and consult with a financial professional, you can make a decision that helps secure your family's future.
Please consult your tax and legal advisors regarding your particular circumstances.
© 2025 Prudential Financial, Inc. and its related entities. Prudential, the Prudential logo, and the Rock symbol are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.
For Compliance Use Only:1046394-00003-00