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 Posted: Fri Sep 30, 2011 10:20 am Post subject: decreasing term life insurance |
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Could anyone please let me know about decreasing term life insurance? I would like to buy a life insurance policy and can’t decide what type to buy and want to know about decreasing term. Please explain!
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Milla Hunt
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| Posted: Fri Sep 30, 2011 11:38 am Post subject: |
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Decreasing term life insurance is a product whose benefit amount reduces each year until it reaches zero after the last day of the contract period. It is not suitable for most needs other than paying off a debt, such as a mortgage, on which the balance owed declines over the same period of time as long as all payments are made.
What is your need for insurance? That will determine the proper policy. Level term life insurance, a policy whose death benefit remains the same from the first day of the contract to the last day, may not be appropriate for your need either.
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MaxHerr
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| Posted: Sun Oct 16, 2011 4:54 pm Post subject: Drcreasing Term Life Insurance |
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It's important to note that with decreasing term insurance, as noted, the coverage decreases over time, but the premium you pay each year stays the same. So you are paying the same premium for an amount of life insurance that is decreasing each year. You may want to compare rates and coverage for decreasing term life with coverage provided for level term life insurance, as the premiums and coverage remain level each year with level term. In addition, if you have a need other than a diminishing debt, you may want to look into the option of renewability for your term life insurance policy. The renewable term life plan allows you to renew your term life insurance at expiration without having to take a physical exam to qualify. And, your increase in rate will depend on your age at that time, not your health.
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Hadley
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| Posted: Tue Nov 08, 2011 4:38 pm Post subject: life insurance |
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Decreasing term life insurance is not a popular product today mainly because they leave the family inadequately insured and are not the best-priced policies. The premiums decrease as the coverage amount decreases. If you’re looking for insurance to cover your mortgage with mortgage life insurance (decreasing term life insurance), you might want to consider buying level term life insurance instead. Your coverage will remain steady the entire term period and you’ll be able to cover your mortgage and more since the premiums are so affordable.
Denise Mancini
Disclaimer: I work for AccuQuote and this is my personal opinion.
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denisem
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| Posted: Wed Nov 09, 2011 3:38 pm Post subject: |
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Premiums for decreasing term life insurance do not decrease. Only the face amount of insurance decreases.
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MaxHerr
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| Posted: Sun Nov 27, 2011 6:27 am Post subject: |
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| Most companies don't sell decreasing term any longer. You would probably be better served with a level term. All of the big boys sell this and if you do find a company selling decreasing term, a level term policy offered by one of the big boys will be more competitive. |
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TaxFreeIncome
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| Posted: Sun Nov 27, 2011 9:21 am Post subject: |
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While it's true that most people would be better served by level premium level term compared to decreasing term, DT is still the most "cost efficient" method to do nothing more than pay off an outstanding debt, such as a mortgage. Level term will not be cost-competitive for the same original face amount and term length. And late in the DT contract, the amount of insurance will be some (or a lot) less than the premium would buy in level term at the same later age for the same number of years. That's the point at which it may be less desirable to continue the insurance and simply devote the premiums to paying down the remaining loan balance early.
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MaxHerr
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| Posted: Sun Nov 27, 2011 5:48 pm Post subject: |
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How can it be more efficient if one is getting less insurance for more money?
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vgyjlcc
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TaxFreeIncome
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| Posted: Mon Nov 28, 2011 10:17 am Post subject: |
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| Quote: | | How can it be more efficient if one is getting less insurance for more money? |
No one said anything about getting less insurance for more money.
Decreasing term has a lower initial premium for the same face amount of coverage as a level term policy. Eventually (last 4-5 years -- maybe a few more than that -- of a 30 year DT policy) even that lower premium will be more than the same (but now greatly reduced) amount of (new) level insurance that would be needed with just a couple of years to go on the mortgage. At that point, as I mentioned above, the DT can be terminated and the premiums devoted to accelerating the repayment of the remaining debt. That is an even more efficient use of one's money.
The "efficiency" in DT comes from paying the least amount of money for the most initial protection -- but protection that closely matches the need as it declines over time, not more. If the ONLY concern is paying off the mortgage and paying the least amount of money to do so, DT will be more efficient than Level Term -- even if all of the premiums are paid for 30 years -- it will be less total money than that paid for the same initial face amount of level term for the same 30 year period. That's "efficient".
As others have also pointed out, this need is not often singular, but it certainly can be. And has been pointed out, Level Term usually makes more sense in most situations because paying off a mortgage (or other debt) is not the only financial concern most folks leave behind when they die. When I find DT in a client's situation, we have to explore their needs. The question I usually ask first is, "So, Mr. and Mrs. Prospect, if the mortgage is paid off, that means all the other expenses of owning a home and raising a family end, too, is that right?"
And the obvious answer is, "Of course not!" So once the total need for protection is in the open, if the DT is no longer meeting that need, I might recommend replacing it. But it doesn't have to be replaced, it can be supplemented with a level term policy of a somewhat smaller face amount. That still makes the DT most efficient. And because the insured is now older than when the DT policy was started (even if by only a couple of years), it may reduce the cost of the level term "supplement" because we don't have to start a new, higher face amount of insurance. If it doesn't, then a lower total cost replacement with a single level term policy is probably in order.
Like all life insurance solutions, there is no single "perfect" policy for all needs. We have a responsibility to provide the best solution we have available, or to send the prospect somewhere else for something better.
Hope this helps.
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MaxHerr
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| Posted: Mon Nov 28, 2011 7:27 pm Post subject: |
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| Quote: |
The "efficiency" in DT comes from paying the least amount of money for the most initial protection -- but protection that closely matches the need as it declines over time, not more. If the ONLY concern is paying off the mortgage and paying the least amount of money to do so, DT will be more efficient than Level Term -- even if all of the premiums are paid for 30 years -- it will be less total money than that paid for the same initial face amount of level term for the same 30 year period. That's "efficient" |
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The problem is that you are missing the fact that even in the first year, the decreasing term insurance might be more expensive. Even if it isn't, a policy(s) can certainly be designed that will be less expensive than the level term over the period of time that coverage is needed.
For instance, if one wanted coverage to cover a 30 year mortgage and this was the only coverage that they needed, they wouldn't buy a 30 year policy and then do nothing with it for 30 years. They would could buy coverage from a company that will let them reduce the coverage over time and/or buy several policies with most being for shorter periods of time.
Unless there is a health issue, I have never seen a situation when decreasing term made sense.
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fjamva
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| Posted: Wed Nov 30, 2011 4:26 pm Post subject: |
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| Quote: | | I have never seen a situation when decreasing term made sense. |
And if the tree falls in the forest but you aren't there to see it, does that mean it makes no sound?
| Quote: | | even in the first year, the decreasing term insurance might be more expensive |
In the words of the immortal Molly of radio days, "'Taint so, McGee."
From the same insurance company (we have to be discussing apples-to-apples here), the product designs of level term and decreasing term cannot possibly result in a level term policy premium (for the same initial face amount of insurance) that is more expensive than decreasing term.
The simple reason is that the combination of increasing mortality risk and declining death benefit protection in a decreasing term policy is a counterbalancing proposition that does not require as much money to cover the risk over time. In a level term policy, the mortality risk is constantly increasing, but the death benefit protection is not declining. Therefore the amount of money required to cover the death benefit in the face of increasing mortality is much higher. It cannot work any other way.
Can you take a level term policy at a high initial face amount and periodically reduce the face amount over time? Of course. But if you do all the math, even that proposition will fail to result in a solution that is less expensive (in terms of total cumulative premiums paid) than the lower (and level) premium decreasing term policy over time.
And there is one other consideration to your plan to reduce the face amount of the level term policy over time. Each reduction in face amount may create an opportunity for the insurance company to actually increase the cost of insurance (a) up to the maximum guaranteed rate, or (b) simply base the continuing premium on the attained age of the insured at each policy "alteration".
Why? Because the contract was written and issued with the insurance company's expectation that the full premium would be paid over the term of the contract. To alter that in a way that gains an advantage over the insurance company violates their "rules of the game". And it definitely is their game. They won't let you violate the rules if it means they will lose the game.
Having said all this, I don't believe most people are well-served with decreasing term either. Not that it doesn't make sense, as you have never seen, but that it leaves most people with a huge protection shortfall, for the reasons I posted previously.
It does make sense. But only from one perspective -- to provide the precise amount of protection needed for a particular purpose.
From a different perspective, it absolutely makes no sense when it leaves a spouse and children with no money to live on after the mortgage is paid off.
That's your perspective, and there's nothing incorrect about that. A larger level term policy will provide a better solution for the larger total need.
But it's not the only perspective. That's the only thing wrong with your failure to have "seen" . . . it's a form of tunnel vision.
=======
Now, here's a thought (apology, if you prefer) concerning a different thread. Just because I had never seen a disability policy that worked the way you indicated, doesn't mean it did not exist. You showed me a policy that's some different than the ones I've dealt with in the past. So my comments were incorrect to that extent. And not all disability policies are like the one you sent me -- not all of us work in the "white collar" market. Many DI policies are not noncancellable, and many do have the features/provisions I mentioned in that other thread (group DI policies, with which I have the most experience, certainly do -- at least here in California, and the one that covered folks -- mostly executives for an oil company in Texas -- I was responsible for in a former agency setting). So tunnel vision can affect us all.
[ If you can recall which thread that was, you can copy this and post it there for me. ]
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MaxHerr
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| Posted: Wed Nov 30, 2011 8:11 pm Post subject: |
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| Quote: | | And if the tree falls in the forest but you aren't there to see it, does that mean it makes no sound? |
No. But if it is a very small forest and I'm in it everyday adn don't see any down trees, there is a good chance that it didn't fall. In other words, if I haven't seen a situation (other than guaranteed issue for someone with health issues) where decreasing term insurance makes the most sense, there is a good chance that it almost never makes sense.
| Quote: | | From the same insurance company (we have to be discussing apples-to-apples here), the product designs of level term and decreasing term cannot possibly result in a level term policy premium (for the same initial face amount of insurance) that is more expensive than decreasing term. |
Why do we need the caveat of the same insurance company? That isn't how we sell insurance. If a client is looking for insurance and can't decide between 10 year and 20 year term, I am not comparing Company ABC's 10 year term to Company ABC’s 20 year term. I am comparing the best 10 year term to the best 20 year term for the client and it will probably be from different companies.
The insurance company, like all companies, are in business to generate the most profit. I have seen insurance companies who charged more for 5 year term than for 10 year term. I have seen companies who had a cheaper price for ART than for 10 year term for all years. It doesn’t have to make logical sense.
Why does Company ABC charge $300 for their term instead of $400? Probably because they can make more money charging $300 than $400. It’s a competitive business. It is easy for a consumer to go on line and compare the prices of level term products.
Why is the cost per thousand of decreasing term so much more than level term? Most likely, it is due to the lack of competition and transparency. Competition brings down the cost of products. The lack of competition allows prices to stay higher. The competition in the level term marketplace simply doesn’t exist in the decreasing term marketplace.
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| Posted: Wed Nov 30, 2011 8:14 pm Post subject: |
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| Quote: | | The simple reason is that the combination of increasing mortality risk and declining death benefit protection in a decreasing term policy is a counterbalancing proposition that does not require as much money to cover the risk over time. In a level term policy, the mortality risk is constantly increasing, but the death benefit protection is not declining. Therefore the amount of money required to cover the death benefit in the face of increasing mortality is much higher. It cannot work any other way. |
You are 100% correct that they don't have to charge as much money because of this. However, like I said, the lack of competition in this area allows them to charge much more on a cost per thousand.
So, although they could charge less, they don't.
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fvmaru
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| Posted: Wed Nov 30, 2011 8:18 pm Post subject: |
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| Quote: | | And there is one other consideration to your plan to reduce the face amount of the level term policy over time. Each reduction in face amount may create an opportunity for the insurance company to actually increase the cost of insurance (a) up to the maximum guaranteed rate, or (b) simply base the continuing premium on the attained age of the insured at each policy "alteration". |
What matters isn't what an insurance can do. What matters is what they actually do. Regardless, this problem is solved by using more than one policy.
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