Why would you buy decreasing term insurance? Decreasing term life
insurance is one of the more popular life insurance policies offered. It is also
known as mortgage protection life insurance.
Decreasing term was designed to pay off your mortgage upon the death of the homeowner, or the person paying the mortgage if that is someone other than the owner of the home.
A husband may put ownership of the home in the wife's name but buy the decreasing term life insurance policy on his life as he is older and expects to die before his wife.
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Upon his death his wife will own a home free and clear. A parent may give a home to a child. As there is a mortgage on the home the parent may choose to pay the installments. This thoughtful parent may buy the policy on his or her own life and upon death the mortgage is paid off.
More often than not though the decreasing term policy is bought on the homeowners life as this is the person paying the mortgage. Here is how this policy works. You pay a very small premium and, as I mentioned before, your mortgage is paid off when you die.
As you make your mortgage payments each year the amount owed to the finance company or bank decreases. In the first few year most of your payments go to interest. As time passes a larger portion goes to paying off the principal.
As your principal decreases the amount of life insurance decreases as well because all that is needed is sufficient money to pay off the mortgage. This is one of the reasons the decreasing term insurance policy is so inexpensive. This policy is almost an automatic decision when one buys a home.
There are alternate ways to go. Some people don't like the idea that the amount of life insurance decreases so they buy a level term life policy. They have a 20 year mortgage or a 30 year duration mortgage so they buy a 20 year or a 30 year level term policy. They pay more for it than the decreasing term policy though. Upon the homeowners death the mortgage is paid off and the balance goes to the beneficiary. The beneficiary gets a little extra, depending at which point death occurred.
There is still another alternative mortgage life insurance policy. This is more commonly referred to as a mortgage redemption policy. You use a permanent policy for this like whole life, universal life, or variable universal life insurance. These policies all build guaranteed cash values and dividends. Dividends are not guaranteed.
As you pay your premiums each year the cash available to you grows as well. At some point there is sufficient cash in the policy to pay off your mortgage. You either surrender the policy and use the cash to pay off your mortgage or you take a policy loan to do this. You would use the policy loan option if you feel you still need some life insurance but can no longer qualify for it because of health reasons.
All in all the decreasing term insurance policy is the one most used because of it's very low premium cost.
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I recently did some research on the development of the 30 year term insurance policy over the years. What I learned was quite interesting.
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