Decreasing term insurance is one of the cheapest life insurance policies out there. The premiums on the renewable policy remain the same throughout the term of coverage, but the death benefit paid decreases in monthly, quarterly or annual increments. Since it is often offered by banks and other home loan institutions as a product that can be folded into your monthly mortgage payment, it is also called mortgage decreasing term insurance. The idea is that for a few extra dollars a month, you can be certain your home loan will be paid off if you die while the policy is in effect. Sounds like a bargain, but is it?
If you’re in poor health or engage in risky behavior, mortgage decreasing term insurance might be a good deal, especially if you can’t qualify for or can’t afford other forms of life insurance. But decreasing term can actually end up being costlier than a more traditional life insurance policy without providing the level of coverage your survivors will need.
With most types of life insurance, you decide who the beneficiary is. With mortgage decreasing term, the beneficiary is the lender.Yes, your home loan will be paid off, but will your family have enough money to pay for other necessities once covered by your pay check? And your spouse will lose the federal tax mortgage deduction.
You should also know that despite the relatively low price tag, decreasing life can actually cost three to five times more over time than comparable coverage under a traditional term life policy, according to Consumer Reports.
Because the benefits on any kind of decreasing term life policy diminish over time, you could end up paying a lot over the life of the policy and receiving very little in return. Say you keep the policy in effect for 30 years and die in year 29. Your heirs may end up with a few hundred bucks – not even enough for final expenses. Or, if you live a nice long life but keep renewing the decreasing term policy, it may simply expire when you reach age 85 and you’ll have put money in the insurer’s pocket with nothing to show for it.
If you decide to purchase mortgage decreasing life, read the fine print carefully. Some of these policies are really accident insurance, meaning they only pay in the event of accidental death.