There
are all types of term life insurance
on the market and one of the various flavors is
declining term life. It's not
nearly as common as
level term life (the
heavy weight on the market) but it is
available and typically for a lower rate
when comparing apples and apples (term
benefit, etc). Let's take a quick
look at declining term life and size it
up versus level term.
First, what is declining term life?
Essentially, it's a payout option where
the life insurance benefit decreases
during the life of the policy. For
example, with 15 years of total term
length, the life benefit may be $500K in
the first 5 years, then $250K if
triggered in the next 5 years, and
finally...$100K if triggered in the
final 5 years of the 15 year policy.
In a nutshell, this is declining term
life. Why would anyone go this
direction?
Price. Declining term life
insurance will be less expensive than
Level term and it's obvious why...the
benefit is decreasing with time.
With level term life, the $500K benefit
(or whatever amount you select up front)
stays the same for the full duration of
the policy . Whether it's year 1
or year 15, the benefit is $500K if the
insured passes away. To some
extent, to make a fair comparison, the
above example of $500K/$250K/$100K
is probably more akin to $250K of
benefit if we want to price it out.
Also keep in mind that on average, the
chance of passing away increases as we
get older. Accidents may happen
any time but diseases that affect
mortality (cancer, heart attacks, etc)
occur at a higher frequency as we get
older. To some extent, the carrier
is reducing it's risk with such a
declining benefit set-up. So
what's our take on declining term life
insurance?
So
often with insurance in general (be it
life, health, or others), people like to
play fortune teller. It's
interesting since risk is risk
regardless of what shape it comes in.
It's similar to someone taking health
insurance and opting out of
chemo/radiation therapy to reduce the
rate. The savings may be big but
you gambling that you won't need these
services. This is only a step away
from gambling that you will not need
health insurance at all. We're all
familiar with someone who went without
health insurance and had a huge medical
bill that financially wiped them out.
Life insurance is no different. To
gamble that you will be less likely to
trigger the benefit in the last 5 years
than the first is counter-intuitive and
the
life insurance companies love taking
this bet (since they know better).
Maybe
there's a rationalization such as "Well,
my mortgage debt is decreasing with time
so I can match the term life insurance
benefit to that fact". The actual
debt (as opposed to equity) is
decreasing but the monthly payment is
the same. Keep in mind that life
insurance is generally used to replace
income over a period of time. It's
hard to believe that income in year
11-15 will be any less needed than in
1-5. If anything, most people will
agree that financial responsibilities
only increase with time...especially for
a family with children that will one day
go off to college (translated as
expensive).
Our
recommendation is to not play a guessing
game for the trade-off of lower rates.
If you guess wrong, you're loved ones
suffer as a result. It makes more
sense to purchase level term life
insurance that fits within your budget.
There may be situations where a person
truly has a decreasing financial
responsibility for which, the decreasing
term life payment option might fit, but
this is usually in addition to a
traditional
term life policy used for
general protection of your family.
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