Asked 3w ago
Decreasing or reducing term insurance refers to insurance policies where benefits decline over time. They are usually found in mortgage insurance policies.
As you pay for your mortgage over time, your outstanding mortgage amount will decrease. Thus, the coverage for your mortgage provided by the policy will also decrease accordingly.
You can also consider checking out term life insurance. They might provide a level or competitive price with mortgage insurance. Feel free to check out this article where we compared term life insurance with the Home Protection Scheme.
Decreasing term insurance means that the coverage amount decreases over the duration of the policy. The rate of decrease depends on the interest rate used in the calculation. So a 30 year decreasing term policy may have $1million coverage if one passes away at the start of the policy, $600K at year 15, and maybe only $50K coverage at year 29. This would be in line with the outstanding mortgage amount on the property.
This option is usually chosen to protect a mortgage and it can be cheaper than a level term policy. However, I often find that a level term policy is not that much more in cost compared to a decreasing term, and thus may be a viable option. For example, in the example above, a decreasing term might cost, say, $900/yr and a level term, which would give a $1 million payout no matter when it is claimed, might cost $1000/yr, which isn't really a lot more. Furthermore, if you upgrade a property say, 15 years later, a decreasing term would not have enough coverage against the mortgage already, while a level term would still protect you for $1 million.
It simply means that your coverage decreases over the term period. The rationale behind mortgage term coverage usually is to hedge against a liability eg. mortgage so in the event something happens to you, your partner need not tank the mortgage loan by him/herself.
Of course, the probability of people dying in their essential working years may not be really high and the need for mortgage term coverage decreases since you are gradually paying it off hence the coverage amount will decrease along the way.
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