What Is Decreasing Term Life Insurance

What Is Decreasing Term Life Insurance?

Decreasing term life insurance is a unique type of life insurance policy that is specifically designed to cover a specific debt over a certain period of time. Unlike other types of life insurance, the coverage amount decreases over time until it eventually reaches zero at the end of the policy term. While decreasing term life insurance premiums are typically lower than other types of policies, it's important to understand the key features of this type of coverage, including the fact that it may not provide enough coverage for long-term needs. In this article, we'll take a closer look at what decreasing term life insurance is and what you should consider before purchasing this type of coverage.

Decreasing term life insurance is a type of life insurance policy that provides coverage for a specific period of time, typically 10, 15, or 20 years. The coverage amount decreases over time, usually annually, until it reaches zero at the end of the policy term. This type of policy is often used to cover a specific debt, such as a mortgage or a business loan, that will decrease over time. Here are some key features of decreasing term life insurance:

Premiums are typically lower than those for level term life insurance.
The coverage amount decreases over time, so the policy may not provide enough coverage for long-term needs.
The policy may have a conversion option that allows the policyholder to convert to a permanent life insurance policy.
The policy may have a renewal option that allows the policyholder to renew the policy at the end of the term, but at a higher premium.

?

Where Should Group Term Life Insurance Be Reported?

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:

The determination of whether the premium charges straddle the costs is based on the IRS Premium Table rates, not the actual cost.
The employer subsidizes and/or redistributes the premium cost through its role.

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.

What Is The Formula For Decreasing Term Insurance?

Decreasing term insurance is a type of life insurance policy where the death benefit decreases over time. This type of policy is often used to cover a specific debt or financial obligation that will also decrease over time, such as a mortgage or business loan. The formula for calculating the premium and death benefit of a decreasing term insurance policy is based on several factors, including the initial death benefit, the length of the policy term, and the rate of decrease. Here is a breakdown of the formula:

Factor	Explanation
Initial Death Benefit	The amount of coverage at the start of the policy
Policy Term	The length of time the policy will be in effect
Rate of Decrease	The percentage by which the death benefit will decrease each year
Premium	The amount paid by the policyholder to maintain coverage
Death Benefit	The amount paid to the beneficiary upon the death of the insured

It is important to note that the premium for a decreasing term insurance policy will typically be lower than that of a traditional level term policy, as the death benefit decreases over time. However, it is also important to ensure that the policy will provide adequate coverage for the intended purpose, such as paying off a mortgage or other debt.

What Is The Trend Of Term Insurance Premiums?

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
$100,000	10 years	$98
$250,000	10 years	$133
$500,000	10 years	$200
$100,000	20 years	$146
$250,000	20 years	$200
$500,000	20 years	$308
$100,000	30 years	$213
$250,000	30 years	$320
$500,000	30 years	$521

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.

What Does A Decreasing Term Policy Contain When It Is Purchased?

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.

Pros	Cons
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.

What Is Decreasing Term Life Insurance?

Decreasing term life insurance is a type of term life insurance policy that provides coverage for a specific period. The death benefit amount decreases over time, usually on a monthly or yearly basis.

Example

Policy	Death Benefit	Percentage Decrease	Payout After 10 years
$300,000, 30-year policy	$300,000	3.33%	$210,000

This type of policy is more affordable than other types of life insurance policies, particularly permanent policies such as whole life and universal life. Decreasing term life insurance is ideal for individuals who have specific expenses or debts that will decrease over time, such as a mortgage, student loan, or business loan.

Decreasing term life insurance isn’t available through all insurers. If you’re interested in this type of policy, you may need to shop around for life insurance to see who offers it.

Before purchasing a policy, consider the specific needs of your loved ones. If they won’t depend on your income long-term, decreasing term life insurance may be the right choice. However, if they will need the original death benefit amount even if you pass away at an older age, other types of life insurance may make more sense.

Use a life insurance calculator to determine the right coverage amount for your loved ones.

Why Is Decreasing Term Life Insurance Often Used?

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.

Advantages	Disadvantages
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.