Life insurance policies can vary greatly in their coverage and benefits. One such option is decreasing term life insurance, which has gained popularity over the years due to its unique features. Unlike traditional life insurance policies, decreasing term life insurance offers a decreasing coverage amount over time, while the premiums remain level. This type of policy is often used to cover a specific debt or financial obligation, such as a mortgage or business loan. In this article, we delve into the features and benefits of decreasing term life insurance, along with the reasons why it may be the right choice for you. So, let's explore how decreasing term life insurance works and what sets it apart from other types of life insurance policies.
Decreasing term life insurance is a type of life insurance policy that provides coverage for a specific period of time, typically ranging from 10 to 30 years. Unlike traditional life insurance policies, the coverage amount decreases over time, usually on an annual basis. This type of policy is often used to cover a specific debt or financial obligation that decreases over time, such as a mortgage or business loan. Here are some key features of decreasing term life insurance:
Group-term life insurance coverage provided under a policy carried directly or indirectly by an employer is excluded from taxes if the total amount does not exceed $50,000, as per IRC section 79. However, if the coverage exceeds $50,000, the imputed cost of coverage must be included in income and is subject to social security and Medicare taxes.
|Policy carried directly or indirectly by the employer||Policy not carried directly or indirectly by the employer|
|Subject to social security and Medicare taxes if coverage exceeds $50,000||No tax consequences to the employee|
|Employees are taxed on the cost of coverage over $50,000||Employer has no reporting requirements|
A policy is considered carried directly or indirectly by the employer if:
A taxable fringe benefit arises if coverage exceeds $50,000 and the policy is considered carried directly or indirectly by the employer. If there is more than one policy from the same insurer, a combined test is used to determine whether it is carried directly or indirectly by the employer. However, policies can be tested separately if the costs and coverage can be clearly allocated between the two policies.
If coverage is provided by more than one insurer, each policy must be tested separately to determine whether it is carried directly or indirectly by the employer. The cost of employer-provided group-term life insurance on the life of an employee’s spouse or dependent, paid by the employer, is not taxable to the employee if the face amount of the coverage does not exceed $2,000. This coverage is excluded as a de minimis fringe benefit.
Example 1: All employees for Employer X are in the 40 to 44 year age group. The employer pays the full cost of the insurance. If at least one employee is charged more than the IRS Premium Table rate, and at least one is charged less, the coverage is considered carried by the employer. Therefore, each employee is subject to social security and Medicare tax on the cost of coverage over $50,000.
Example 2: All employees are charged the same rate, which is set by the third-party insurer. The employer pays nothing toward the cost. It does not matter what the rate is if the employer does not subsidize the cost or redistribute it between employees.
Example 3: A 47-year old employee receives $40,000 of coverage per year under a policy carried directly or indirectly by her employer. She is also entitled to $100,000 of optional insurance at her own expense. This amount is also considered carried by the employer. The cost of $10,000 of this amount is excludable; the cost of the remaining $90,000 is included in income.
It is important to understand the tax consequences of group term life insurance coverage provided by an employer to avoid any issues with reporting and taxes.
A decreasing term life insurance policy provides coverage for a specific period, usually between five and 30 years. The death benefit amount your beneficiaries can receive reduces every month or year (depending on the policy) after you purchase the policy.
|Policy||Amount||Term||Rate of Decrease||Payout after 10 years|
|Decreasing term life||$300,000||30 years||3.33%||$210,000|
If you die during the policy’s term, your beneficiaries can claim the death benefit amount available at that time. If you outlive the policy’s term, the death benefit will have decreased to zero, and your coverage will terminate. Decreasing term life insurance is more affordable than permanent policies like whole life and universal life, and it is even more affordable than standard term life policies.
If you have specific expenses or debts that you want to cover in case you pass away, and your beneficiaries won’t depend on your income long-term, decreasing term life insurance is an excellent option. For instance, if your spouse has their own income or if your children are grown and self-sufficient, then decreasing term life insurance can provide timely security for decreasing expenses. However, decreasing term life insurance may not make sense if your loved ones will need the original death benefit amount even if you pass away at an older age.
It’s important to note that decreasing term life insurance is not available through all insurers. Therefore, you may need to shop around for life insurance and see who offers it. Use our life insurance calculator to determine the right amount of life insurance for your loved ones.
If you choose the right term life insurance length, the coverage will be in force during the most crucial financial years for your family—for example, up until the point your mortgage is paid off or your kids have made it through college. But goals can change. You might later find that the term length of your life insurance policy isn’t long enough to meet your needs. You might even decide that what you really want is coverage that lasts a lifetime. Does that mean you have to go back to square one and get a new policy? Not necessarily.
Term life insurance policies typically offer the option to convert them into permanent life insurance policies. Making the switch is easy, but deciding whether it’s the right move isn’t that simple. Here’s what you need to know about how and why to convert term life to permanent life insurance.
|30-year-old male, nonsmoker, excellent health||30-year term, $500,000 death benefit||$368.20 (preferred plus rate)|
|Same male, now age 40||Converted to a guaranteed universal life, $500,000 death benefit||$4,580 (preferred plus rate)|
Converting a term life policy to a permanent policy is much simpler than applying for a new policy. First, check the language of your policy to see if conversion is an option (it is on most policies). Next, check the term conversion period—the time frame during which you can convert. Then contact your insurance agent or company to ask to convert your policy. You won’t have to take a life insurance medical exam or go through the underwriting process.
There are no fees to convert a term policy to a permanent policy, but the rate you pay for coverage will increase. Although your health won’t be a factor because you lock in your original underwriting class, your age when you convert will affect your rate. The amount you convert also will impact your premium. For example, if you have a policy with a $500,000 death benefit, you could convert just $250,000 of it to a permanent policy. When you convert might also affect your rate.
Before you convert a term policy, there are several questions you should ask yourself and your life insurance agent or company. You need to know your objective when converting to a permanent policy. You will pay more for a permanent policy, so you need to consider not only whether you can afford the higher premiums now but also in retirement. You might only be able to convert to a universal life policy, so check with your insurer to see what policies are available before committing to a conversion.
Decreasing term insurance is a type of life insurance where the cover provided reduces annually for the duration of the policy. This type of policy is suitable for those who only want to cover a specific debt, usually a repayment mortgage. The premium for this policy remains the same for the duration of the policy, but the amount of cover reduces annually.
|Decreasing Term Insurance||The cover provided reduces annually for the duration of the policy. This is suitable for those who only want to cover a specific debt, usually a repayment mortgage.|
|Level Term Insurance||The cover provided remains constant throughout the term of the policy. This is suitable for those who want to ensure their family can pay for day-to-day living costs and household bills.|
|Increasing Term Insurance||The cover provided increases over time to help protect the policy’s value against inflation.|
|Family Income Benefit||Pays out a monthly tax-free income to your family if you die within the term of the policy.|
|Whole of Life Cover||The policy is designed to run for the remainder of your life and guarantees a pay-out to your loved ones when you die.|
It’s essential to choose the right type of policy for your needs. If you’re not sure which type of cover is best for you, it’s worth speaking to an independent broker, such as LifeSearch, who can discuss your options with you and find you the most appropriate cover.
Decreasing term insurance is cheaper than level term insurance because the amount of cover reduces over time. However, the amount you’ll pay for your premiums will depend on factors such as your age, health, and lifestyle. It’s best to take out life insurance while you’re young to get the best rates.
When calculating how much life insurance you need, factor in how much your mortgage is currently worth, as well as how much interest you’re paying. Ensure that the amount of cover does not fall at a significantly faster rate than your outstanding mortgage debt.
If decreasing term life insurance isn’t right for you, you could consider other options such as level term insurance, increasing term insurance, family income benefit, or whole of life cover. Whole of life cover is usually purchased as part of estate and inheritance tax planning and is more expensive than term insurance as a claim is guaranteed.
In conclusion, if you have a repayment mortgage, decreasing term insurance is worth considering to ensure that your loved ones can pay off the mortgage if you die. If you have an interest-only mortgage or want to leave additional funds to cover other expenses, level term insurance may be more suitable.
A Decreasing Term life insurance policy is a type of insurance that offers a payout amount that decreases over time. This policy is set for a fixed period and is generally a less expensive form of life insurance. The following are the things to consider when obtaining a Decreasing Term policy:
Decreasing Term life insurance is a policy that pays out less as time goes on. If you pass away near the beginning of the term, your beneficiaries will receive more money than if you pass away nearer to the end. This insurance can provide peace of mind that your loved ones will have enough financial support to pay off outstanding debts.
Decreasing Term insurance is typically taken out to cover a specific debt, usually a capital repayment mortgage. The amount of cover reduces in line with your outstanding mortgage liability. This means your loved ones will have enough to cover the amount left, should you pass away during the term of the policy. It is better suited to a repayment mortgage, not an interest-only mortgage.
Critical Illness cover can be incredibly beneficial in offering financial support if you were diagnosed with a critical illness. You can take out Critical Illness cover with Decreasing Term life insurance if you wish. You have a choice whether to take both as combined cover or as standalone policies. If you take out both policies as combined cover, you only pay one monthly premium. The cost of your premium will increase to reflect your increased cover. Combined cover usually only pays out once; so if you claim on the Critical Illness part of your policy, you will no longer be covered for life insurance. You can take out both policies separately, which means you will pay for two policies, but you will be covered for both circumstances.
As this type of policy is usually designed to help pay off the mortgage, taking out a joint policy can be a better option. Joint policies can be cheaper than two single policies and mean that whoever passes away first will leave enough money to pay off the mortgage. The remaining partner can then take out their own life insurance policy according to their financial needs.
The cost of Decreasing Term life insurance is usually dependent on how much is left on your mortgage. Your cover will be aligned with the length and amount left on your mortgage, and will decrease throughout the term. Decreasing Term cover is usually a cheaper option because the policy becomes less expensive to insurers over time.
|Decreasing Term Cover||Cheaper option, payout amount decreases in line with mortgage liability||Only pays out once, policy becomes less valuable over time|
|Critical Illness Cover||Provides financial support if diagnosed with a critical illness||Can be expensive, may not be necessary if you already have medical coverage|
|Joint Cover||Cheaper option, ensures mortgage is paid off with a single policy||Only covers one mortgage, may not provide sufficient coverage for both partners|
When considering life insurance options, it is important to consult with an advisor from a reputable insurance provider to determine the best policy that meets your financial needs.
Life insurance costs vary significantly based on factors such as gender, age, type of policy, coverage amount, and length of coverage. Forbes Advisor’s analysis shows that for a 20-year, $250,000 term life insurance policy, the average cost for a man age 30 is $13 a month ($159 a year), while for a woman age 30, it is $12 a month ($142 a year). For 40-year-olds, the average cost rises to $19 a month ($223 a year) for a man and $16 a month ($193 a year) for a woman. At age 50, the average cost for a 20-year, $250,000 term life insurance policy is $40 a month ($477 a year) for men and $32 a month ($378 a year) for women.
It’s essential to buy life insurance when you’re younger as rates increase as you age. Term life insurance allows you to lock in level rates for a set term, such as 10, 20, or 30 years. The following table shows the average annual rates for a 30-year-old for varying term lengths and policy payouts:
|Policy Payout||Term Length||Average Annual Rate|
Permanent life insurance, such as whole life insurance, is generally more expensive than term life insurance. The monthly or yearly premium quoted does not reflect the total cost of the policy, as high internal policy charges may eat into your cash value. It’s essential to work with an experienced financial advisor or life insurance agent to understand the true costs of a policy.
Life insurance companies focus on factors that help them determine your life expectancy, such as your age, gender, medical history, smoking status, and occupation or hobbies. Comparing rates among multiple companies will help you find the best fit for your needs and budget. It’s essential to buy life insurance as soon as possible when you have a need for it, as waiting may cause rates to increase or a health condition to develop, leading to higher rates.
Decreasing term life insurance policies provide coverage for a specific period, usually between 5 and 30 years, and are more affordable than standard term life policies. When you purchase a decreasing term policy, you choose the policy’s duration and the initial death benefit amount. After that, the payout your beneficiaries can receive will decrease each month or year, depending on the policy, until it eventually reaches zero. If you pass away during the policy’s term, your beneficiaries can file a claim for the death benefit amount available at the time of your passing.
|More affordable than standard term life policies||The payout amount decreases over time|
|Offers security for decreasing expenses, such as mortgage or business loans||May not be available through all insurers|
|Can be a more affordable way to offer protection for children or family members who depend on your income less and less as time passes||If your loved ones will need the original death benefit amount even if you pass away at an older age, non-decreasing types of life insurance may be more appropriate|
If you’re interested in a decreasing term life insurance policy, you may need to shop around for insurers that offer it since it isn’t available through all insurers. Consider a decreasing term life insurance policy if you have specific expenses or debts that you want to make sure are covered in case you pass away, and your beneficiaries won’t depend on your income long-term. Use a life insurance calculator to determine the right amount of life insurance for your loved ones.
Decreasing term life insurance is a type of term life policy that provides coverage for a specific period, typically between five and 30 years. The policyholder selects the number of years the policy will be active and the starting death benefit. Over time, the death benefit decreases at a fixed percentage per month or year until it reaches zero at the end of the policy term.
|More affordable than whole life and universal life policies||Payout decreases over time|
|Can provide security for decreasing expenses, such as mortgages, loans, or children’s expenses||May not be available from all insurers|
Decreasing term life insurance is often more affordable than standard term life policies because the payout decreases over time. It can be an excellent option for people who have specific expenses or debts that will decrease over time, such as mortgages, student loans, or business loans. It can also be a more affordable way to provide protection for children and family members who depend on the policyholder’s income less and less as time passes.
However, decreasing term life insurance may not be available from all insurers, and the payout decreases over time, which may not suit everyone’s needs. If you’re interested in a decreasing term life policy, you may need to shop around for life insurance to find an insurer that offers it. Non-decreasing types of life insurance may make more sense if your loved ones will need the original death benefit amount even if you pass away at an older age while the policy is still active.
Ultimately, the right type of life insurance policy depends on your specific needs and circumstances. Use a life insurance calculator to determine the appropriate amount of coverage for your loved ones.
Level term life insurance is a type of life insurance that provides level benefits for a set amount of time. The policyholder pays a fixed premium, and the death benefit amount remains the same throughout the policy term. Here are some key things to know about level term life insurance:
|Advantages of level term life insurance||Disadvantages of level term life insurance|
|Provides predictable death benefit||Premiums can be more expensive than other types of life insurance|
|Helps with budgeting as premiums remain level||Does not build cash value|
|Can be cheaper in the long run as coverage and rates are based on current health||May not be the best option for those with fluctuating health conditions|
One alternative to level term insurance is annual renewable term life insurance, which renews each year with rates going up as you get older. Another alternative is decreasing term life insurance, which provides a death benefit that decreases over time. However, decreasing term life insurance is often less expensive because the payout decreases over time.
If you want to increase your coverage with level term life insurance, you may need to reapply with new forms and a new medical exam. Decreasing coverage, on the other hand, is usually easier and only requires filling out a form. Alternatively, you could ladder your term insurance policies to get the total coverage you need, which may reduce your overall premiums.
Overall, level term life insurance can be a good option for those looking for predictable and budget-friendly life insurance coverage. However, it may not be the best option for those with fluctuating health conditions or those who want a policy that builds cash value.
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