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Level Term vs Decreasing Term Life Insurance — Know the Difference!

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With term life insurance, you can have financial coverage for your beneficiaries amidst unfortunate circumstances. Two of its popular types of decreasing and level term insurance. 

Decreasing term life insurance is a type where the coverage decreases gradually over a set duration. In contrast, level-term life insurance provides a fixed sum to the insured’s beneficiaries upon the former’s demise.

In this article, we will explore the distinction between decreasing vs level insurance, the benefits of each type, and how you can determine what works best for you.

What is Decreasing Term Insurance?

As we saw above, under decreasing term insurance, the payout decreases over time. 

This type is often referred to as 'mortgage' life insurance because it is commonly used to cover repayment mortgages. 

Important: Despite the reducing payout, decreasing term insurance premiums remain fixed throughout the tenure. However, the premiums are usually lower than those of level term plans.

How Does Decreasing Term Life Insurance Work?

This type of insurance operates as a form of fixed-term life insurance, wherein coverage is obtained for a specified duration. The insurance provider gradually reduces the payout amount over each year until the policy's conclusion.

With decreasing term life insurance, you have the autonomy to determine the coverage amount, although the sum paid out upon the policyholder's demise diminishes progressively over time. This type of policy is advantageous if you aim to utilise life insurance to settle a specific debt.

For instance, consider a scenario where you possess a mortgage with both capital and interest repayments. Your objective is to ensure that your family won't be burdened with mortgage payments in the event of your demise.

In this scenario, decreasing term life insurance proves beneficial as the outstanding mortgage amount will also diminish over time. Consequently, your life insurance can be utilised to clear the remaining mortgage debt. This saves your family from a big financial responsibility in case of an unfortunate event.

What is Level-Term Life Insurance?

As the most popular type of term insurance, it provides coverage for a specified period. If the insured passes away in this duration, their beneficiaries receive a predetermined lump sum. 

The coverage amount and term are chosen by you based on factors such as mortgage obligations, living expenses, or future financial needs like education or weddings.

How Does Level-Term Life Insurance Work? 

Before moving on to level term vs decreasing term life insurance, let’s quickly understand how the former works.

Instead of varying payouts, it offers a fixed cash sum in the event of the insured’s death during the policy's duration. You have the flexibility to select the term length, tailoring it to your needs. 

For instance, if you're the primary earner supporting a family, a single policy might suffice. Conversely, households reliant on dual incomes might find a joint policy more advantageous.

Unlike decreasing term policies where payouts diminish over time, level term insurance maintains a consistent payout throughout the policy term. This allows you to designate a specific amount to support your loved ones.

The reasons for opting for level-term life insurance are varied — you can get it to have coverage for your family in covering funeral expenses, settling outstanding debts, or securing their financial stability moving forward.

Level Term vs Decreasing Term Life Insurance — Which One is Beneficial? 

The primary distinction between these policies lies in how the payout is structured. While level term insurance offers a consistent lump sum payout, decreasing term insurance aligns with decreasing liabilities such as mortgages.

Let’s understand the benefits in each case —

Benefits of Level Term Insurance

Benefits of Decreasing Term Insurance

  • Fixed lump sum payout, providing financial stability 
  • Cost-effective option with premiums lower than level term insurance
  • Full payout regardless of when death occurs during the term
  • Payout aligns with decreasing debts like mortgages
  • Suitable for maintaining living standards and future goals
  • Ideal for repayment mortgages or fixed-term loans

Decreasing vs Level Insurance — Choosing the Right Policy for You! 

It’s worth noting that the distinction of decreasing vs level insurance and choosing the appropriate life insurance policy depends on your financial circumstances and goals. 

Consider the following factors —

  • Repayment Obligations: If you have a repayment mortgage or a fixed-term loan, decreasing term insurance may be the ideal choice to cover these specific debts.
  • Financial Flexibility: Level term insurance offers a lump sum payout that can be used flexibly, providing peace of mind and allowing your family to manage finances as per their needs. Simply put, if you want sufficient funds for your family’s future needs related to marriages, education, and more, level-term insurance might be a better option.
  • Estate Planning: For individuals with significant estates, level term insurance can assist in the long-term management of finances, ensuring that their loved ones receive their rightful inheritance.

Wrapping Up

Life insurance is a vital component of financial planning. It offers reassurance that the insured’s loved ones will be financially protected in their absence. By understanding the differences in terms of level term vs decreasing term life insurance and your long-term financial goals, you can make an informed decision that secures your family's future.

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