What Is Decreasing Term Life Insurance?

Liz Caldwell is a senior director of Risk Product Development at Northwestern Mutual.

If you’re learning about the different types of life insurance, you might hear about “decreasing term life insurance.” We’ll explain how it works and why you might use it, along with some advantages and disadvantages.

How does decreasing term life insurance work?

Let’s start with a refresher of what term life insurance is. It’s insurance that covers your life for a certain time frame. It pays out a death benefit if you die before the insurance ends. After that, it either ends or may be converted into permanent life insurance, which lasts throughout your lifetime and has additional benefits.

When you apply for term life insurance, the company looks at factors like:

• Your age – You’ll pay less per year if you start your life insurance policy when you’re younger.
• Your health – Your overall health and whether you smoke will impact the amount you pay for your policy.
• Your gender – Because women tend to live longer, they can expect to pay slightly less.
• Your amount – Of course, you’ll pay more for a larger death benefit.

With a traditional term policy, your policy covers you for the term of the policy—meaning that if you die at any point within that time frame, your family will receive the full benefit amount.

When it comes to decreasing term life insurance, the death benefit (life insurance payout) goes down over time. As the years go by, your family will get less money if you pass away before the coverage ends.

Your payments (premiums) can vary by policy. The cost may either decrease as the years go by or stay the same.

If you were to die right after establishing the policy, your beneficiary would get the full amount. Let’s say that’s $500,000. But if you die after two decades have passed, the beneficiary will get significantly less. Maybe they’d get only about $100,000. Your policy would have details about the way the payout decreases over time.

Why would someone have a decreasing term life policy?

When you hear about the decreasing payout, you may wonder why this style of policy makes sense. It can be useful if the expenses you’re concerned about are also decreasing. For example, that might be a home mortgage, student loan or small-business loan. You might look for this type of policy if you have young children now but expect them to live on their own in the future and don’t want to leave a financial legacy.

What are some considerations with decreasing term life insurance?

Make sure you understand your policy before you sign your application. Here are some things to keep in mind.

• When you start a decreasing term life insurance policy, you’re predicting that your loved ones will need a lower death benefit a few decades into the future. If you’re wrong, that death benefit might not leave behind enough money.
• If you outlive your coverage with a decreasing term life insurance policy, then you may need to look for a new policy. It’s likely to be significantly more expensive if a lot of time has passed because life insurance costs less when you’re younger. And if your health has deteriorated, then you may not qualify at all.
• Another disadvantage is that when this type of policy reaches its end, it simply expires. It usually is not eligible for term conversion. This is a valuable process that allows you to switch into a permanent policy in the future—and the company won’t consider your health when you convert.
• Like other types of term insurance, decreasing term life insurance has no cash value. Cash value is a unique feature of a permanent life insurance policy that allows you to build up cash and borrow against your policy.  

Decreasing term life insurance is also relatively hard to find. Here at Northwestern Mutual, we’re proud to be the largest direct provider of life insurance in the U.S.¹ We satisfy our clients’ needs without offering decreasing term life insurance.

For clients who need term life insurance, our financial advisors design a customized solution using annual renewable term or level premium term. Annual renewable term life insurance gives you coverage at a lower initial cost, but the premiums will increase every year as you get older.

• Term 80 is our longest coverage term and lasts until age 80.
• Term 10 is our most affordable coverage and lasts for up to 10 years.

Level premium term life insurance means your premiums will stay the same throughout the term.

• Level Term 20 covers you for 20 years, and your premiums will not go up throughout the entire period.
• Level Term 10 also gives you coverage for 20 years, but the premiums will increase for the second 10-year period.

Which life insurance is best for me?

Your Northwestern Mutual financial advisor can help design a tailored solution for you that covers all of your needs. They can also look beyond insurance at your entire financial plan to help reveal blind spots and opportunities that often go unseen.

¹Latest U.S. rank as of 2023 based on direct premiums written. Source: S&P Capital IQ Pro. Prepared and calculated by Northwestern Mutual.