Decreasing Term Insurance
A life insurance policy that allows for the decrease of the benefit on a monthly or yearly basis
What is Decreasing Term Insurance?
Decreasing term insurance, also called DTA insurance, can be defined as a life insurance policy with a feature that allows for the decrease of the benefit on a monthly or yearly basis. Ideally, the size of the policy also decreases over the period until the coverage period concludes or until the policy pays out.
Decreasing term insurance policies are ideal for financial obligation coverage, i.e., a loan. The idea that the loan amount decreases over time allows for the complement of decreasing term insurance. The insurance policy is more affordable and renewable.
Due to the nature of decreasing term insurance, the policy is generally cheaper than level term insurance. It is because the face value or death benefit declines over time, and the insurance provider must charge lower premiums in conjunction with the decreasing risk over time.
Summary
- Decreasing term insurance, also called DTA insurance, can be defined as a life insurance policy with a feature that allows for the decrease of the benefit on a monthly or yearly basis.
- Due to the nature of decreasing term insurance, the policy is generally cheaper than level term insurance.
- The payout structure is a key difference between a DTA insurance policy and a standard term policy or term life insurance.
Understanding How DTA Insurance Works
The payout structure is a key difference between a DTA insurance policy and a standard term policy or term life insurance. An example of the payment structure of a decreasing term life insurance policy would be as follows:
A client purchases a 30-year decreasing term life insurance policy. The policy comes with a face value of $850,000 and an annual 6% reduction. Should unforeseen circumstances occur and the client passes away in the first year, their beneficiaries would receive the full $850,000 payout or death benefit.
Should the client pass away in the second year, the death benefit to their beneficiaries would be the face value minus the reduction of 6% ($51,000), which is $799,000. The reduction will continue yearly until the client passes away and the policy pays out, or the 30-year term comes to an end.
In terms of a standard term policy (or a level term life insurance), the face value of $850,000 would remain constant over the policy’s life.
Both policies come with term lengths, which can go up to 30 years, and they both charge constant premiums over time.
Reasons to Consider or Purchase Decreasing Term Insurance
1. Allows the purchases to cover their financial obligations, debt, or loans
Choosing the ideal cover is dependent on one’s financial situation and the reasons for seeking the purchase of insurance coverage. Decreasing term insurance is ideal for individuals who wish to cover their financial obligations, debt, or loans. The instrument is ideal because it complements the size decrease of the debts and financial obligations over a fixed period of time.
2. Provides beneficiaries with a means to settle debt obligations
Decreasing term insurance provides aid for one’s beneficiaries to settle debt obligations should anything happen. Examples of debts that can be covered with decreasing term insurance include personal loans, business loans, loans for vehicles (or auto loans), and mortgage loans.
3. Allows the purchaser to select their beneficiary and how the funds should be allocated
Decreasing term insurance allows the purchaser to select their beneficiary, and that individual is free to choose how the funds being paid out should be allocated.
In credit or mortgage life insurance policies, however, the lender is usually listed as the beneficiary. Hence, should the policyholder pass away, the funds go directly towards servicing the debts or repayments. It is what makes them different from DTA insurance.
4. Provides small business owners with debt financing
Furthermore, decreasing term insurance is ideal for small business owners who may seek debt financing to support the operations of their businesses. If the business owner passes away, there is a contingency plan for the repayment of the debt.
More Resources
CFI offers the Commercial Banking & Credit Analyst (CBCA)® certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:
