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Cheap Decreasing Term Insurance: Better Options Available

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You have heard that the cheapest form of life insurance is Term. That's true, almost.

Term insurance is very inexpensive because you pay only the cost of insurance and fees averaged across a certain time period, usually 20 years. A few companies offer 30 year terms for those under 40 while most also offer 10 and 15 year terms. Several companies—usually those that do mass marketing through the mail—also offer 5 year terms, especially to seniors. Be wary of those.

The Term insurance—which you may also want to avoid—that is even cheaper than level term is Decreasing Term. These were especially popular years ago and roughly coincided with the arrival of large mortgages, especially those that required minimal down payments or only the closing costs up front. The insurance was offered by the bank, added only a few dollars to the monthly payment, and guaranteed that if the insured person died, the mortgage would be paid off. The premium was level for the life of the term, but the face value decreased yearly, slowly at first, and then very rapidly in the final years of the term.

You can no doubt visualize the concept. As you pay your mortgage, you also pay life insurance; the only purpose of that insurance is to pay the bank in the event of your death. Any left over funds would go to a second beneficiary, but you can bet they were arranged in such a way that at any given point there would be very little face value beyond that needed to clear the debt. When the mortgage was paid off, the payments stopped on the insurance as well, and there was nothing left to collect.

Some banks still offer decreasing term life insurance policies, although level term is more popular today. Additionally, some life insurance companies entice people with the idea of a minimal premium, explaining that as the family grows and moves out of the house, the need for a high face value decreases. However, when you buy a decreasing term, you pay for 20 or 30 years; if you enjoy a long life, your heirs are likely to discover that your term has dropped to the point of only a few hundred dollars for final expenses. Furthermore, many expire altogether after age 85.

Would you like to put money into a savings account only to see that savings decrease every year? Probably not. But that is the equivalent of what happens with a decreasing term. Other term options are better for most people, such as Level Term, or—for a limited time period—even annually increasing term. Another option is "modified term" which usually means that your premium increases in 5 year bands. In any case, when you buy term insurance, be sure to buy it from a company that has the option of converting it to either universal or whole life. That way, you don't risk being entirely without insurance if the Term expires and your health has changed so that you are ineligible for any other policy.