Difference Between Level Term vs Decreasing Term Life Insurance

level term and decreasing term life insurance policy

Many have this misconception that all life insurance policies are the same. However, that is not true. While opting for a life insurance policy, individuals can choose between level term and decreasing term life insurance policies. While both of these insurance policies have their own benefits, there are a few notable differences between the two.

In this guide, we will help you understand these differences so that you can choose the best option per your financial needs and planning.

Table of Contents

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What is a Level Term Life Insurance Policy?

A level term policy is a type of term insurance plan, where you have to pay a fixed amount of premium throughout the policy tenure without increased rates every year. Therefore, this is the most common type of life insurance policy and generally appeals to young families looking forward to protecting their finances in the event that one parent (or both) dies.

For example, you have opted for a level term life insurance policy for, say 25 years and the insurance provider charges a monthly premium during that tenure. Additionally, while applying for insurance, you will have to choose the coverage amount which remains fixed throughout the coverage tenure. In this case, let us assume, you choose a coverage amount of ₹ 1,00,000. The insurance provider will pay your family ₹ 1,00,000 in case you pass away during the 25 year tenure.

What is a Decreasing Term Life Insurance Policy?

A decreasing term life insurance policy has a feature that allows policyholders to reduce the benefits on an annual or monthly basis. Consequently, the coverage amount also decreases as the policy term comes to an end or until the policyholder claims the coverage.

So does that mean my premiums reduce over time. Unfortunately no as they are calculated to cover the full cost of the policy, so your premium remains the same. Although the payout decreases over time, the overall cost is still lower compared to a policy with a constant payout.

For example, you have purchased a decreasing term life insurance policy for a term of 30 years with an annual reduction rate of 6% and have chosen a coverage amount of ₹ 1,50,000. In case you die in the first year, the beneficiaries will receive the total coverage amount of ₹ 1,50,000. However, if you pass away after a year and during the policy term, the coverage amount will reduce as per the reduction rate.

Difference Between Decreasing Life and Level Term Insurance Policies

That said, the table below illustrates the key differences between level term and decreasing term insurance policies:

Parameters Level Term Insurance Policy Decreasing Term Insurance Policy
Coverage Amount Remains the same throughout the policy term Decreases over the policy term
Premiums Fixed and do not change over the term Typically fixed, but the payout reduces over time
Death Benefit Fixed payout amount The payout amount reduces with time
When to Opt Best for protection against interest-only mortgage Best for protection against repayment mortgage
Affordability Generally costlier than decreasing term insurance policy At times, the cheapest type of life insurance policy
Use Cases Young families, general financial protection Mortgage or other diminishing financial obligations

When Should You Opt for Level Term Life Insurance

Level term insurance is best considered when you are looking for a straightforward and cost-effective way to provide financial protection for your loved ones over a specific period. This might be particularly relevant during key times in your life such as:

Starting a Family

If you have or are planning to have children, level term insurance can provide financial security for their future, covering important years of their upbringing and education.

Mortgage Protection

It's common to align the term of a level term insurance policy with the length of your mortgage. This way, should anything happen to you, the policy payout can help cover mortgage payments and ensure your family can stay in their home.

Income Replacement

If you are the primary earner in your family, level term insurance can offer a safety net, ensuring that your loved ones can maintain their standard of living without your income.

Debt Coverage

If you have significant debts (outside of a mortgage) that would be a burden to your family in the event of your passing, a level term policy can provide the funds needed to settle those debts.

Business Protection

If you are a business owner, a level term policy can help cover your portion of business debts or provide a financial cushion for your partners to manage the business in your absence.

Estate Planning

For those concerned about estate taxes or providing for heirs, level term insurance can be effective in estate planning. It offers a lump sum that can help cover taxes or be distributed according to your wishes.

When Should You Opt for Decreasing Term Insurance

Decreasing term insurance is particularly suitable in situations where your financial liabilities decrease over time. Here is when you might consider getting decreasing term insurance:

Mortgage Protection

If you have a mortgage that represents a significant debt that diminishes over time as you make payments, decreasing term insurance can ensure that your mortgage is covered in the event of your untimely death, without leaving your beneficiaries with a larger payout than needed.

Income Replacement for Specific Time Periods

If you are primarily concerned with providing for your dependents only until they reach financial independence, decreasing term insurance can match the gradually reducing financial risk.

Business Loans

If you have taken out a loan for your business that reduces over time, a decreasing term insurance policy can ensure that the loan is paid off if something were to happen to you. This can be crucial for safeguarding the financial stability of your business for your partners and employees.

Personal Loans or Debts

If you have any other personal loans or financial commitments that decrease over time, such as a car loan, you might consider a decreasing term policy to cover these debts, ensuring they are not a burden to your family.

Educational Expenses for Children

For parents who are saving for their children's education and want to ensure there is enough to cover their tuition and other expenses, a decreasing term policy could be aligned with the years you will be paying these costs. As your children grow and start their careers, the need for this financial protection decreases.

Budget-Friendly Option

If you're looking for a more affordable life insurance option that still provides substantial coverage during critical periods of financial obligation, decreasing term insurance can be a cost-effective solution.

Things to Consider Before Selecting a Term Life Insurance Policy

Individuals wanting to opt for a level term or decreasing term insurance policy must know the following things before purchasing it:

Determine the Coverage Amount

In order to establish the amount of coverage one actually needs, candidates should consider assessing several aspects, such as:

  • Their age
  • Financial responsibilities
  • Future financial requirements of their family
  • Basic expenses as per lifestyle habits
  • On-going loans

Determine the Insurance Policy Period

Candidates must opt for a policy period based on their age, retirement plan and other financial responsibilities. Generally, young candidates can consider opting for a longer policy period. Further, those who have a retirement plan should opt for a policy period until they reach their retirement age.

Look for Feasible Payout Options

The policy's premium amount will be based on the payout option one chooses. Individuals have the option of choosing between a regular monthly income payout and a lump sum payout. Policyholders must choose the option that best suits their requirements.

Choose the Correct Insurer

With a number of insurance providers offering different types of policies, one must choose the insurer as per their needs. In this regard, applicants can choose their insurance providers after assessing several factors. Some of these are as follows:

  • Claim settlement ratio
  • Solvency ratio
  • Financial background
  • Market reputation

Which is Better Between Level Term and Decreasing Term Insurance Policy?

Choosing between level and decreasing term life insurance depends on an individual's needs. For both insurance products, beneficiaries receive a death benefit in case the policyholder passes away during the policy term. Further, the insurance premiums for both remain stable throughout the policy tenure.

In case an individual wants protection against a certain loan, a decreasing term life insurance policy can be an ideal choice. However, level term life insurance can be a better choice, if individuals want to cover their family's basic expenses in the event of their death.

 

To sum it up, one should consider the above-mentioned pointers while choosing between a level term and decreasing term insurance policy. While both of these have their own advantages, there are certain differences that make them unique in their own way.

FAQs about Level Term Vs Decreasing Term Life Insurance

What should I opt for a level term or decreasing term life insurance policy?

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Whether one should opt for a level term or decreasing term life insurance policy will totally depend on his or her personal requirements and future plans. Both of these insurance types provide financial protection to the beneficiaries if the policyholder dies.

What is the use of a level term insurance policy?

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Level term insurance provides fixed coverage to the beneficiaries if the policyholder dies during the specified policy tenure.

What is the meaning of a twenty year level term policy?

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If a candidate opts for a level term insurance for a period of twenty years, his/her family will receive a death benefit from the insurer in case of death during the twenty years term.

What decreases during a decreasing term insurance policy?

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In the case of decreasing term insurance, the death benefit during the end of the policy term decreases periodically.

What is decreasing-term insurance, and how does it work?

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Like level term, decreasing-term insurance covers you for a specific period, and the premiums stay constant throughout the life of the policy. The big difference: With a decreasing-term policy, the death benefit diminishes over time, typically in one-year increments. This can help if you want to secure a specific loan, like for a business or mortgage.

What is the difference between level term and decreasing term life cover?

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In Level term insurance, the payout amount stays the same throughout the policy. Whereas in decreasing term insurance, the payout amount decreases over time.

What type of policy should I choose if I want to pay off my debt?

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The best insurance policy depends on your debt. If your debt decreases over time, like with some home loans, choose a policy that decreases too. But if you need to pay off many debts and want to leave money for your family, go for a policy that stays the same throughout its term.

Can I have both types of life insurance?

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Yes, you can have both if you can afford it. A decreasing term policy can cover your mortgage, while a level term policy can provide a fixed sum for your family.

What is decreasing-term insurance, and how does it work?

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Decreasing-term insurance is a type of life insurance that covers you for a set period, with premiums that stay the same throughout the policy. The main difference from other types of term insurance is that the death benefit decreases over time, usually every year. This type of insurance is helpful if you want to cover a specific loan, like a business loan or mortgage, which also decreases over time.

When should you buy decreasing-term life insurance?

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You should buy decreasing-term insurance if it's required to secure a loan, such as a mortgage. You could also use it instead of key person insurance, which protects a business if an important owner or executive dies unexpectedly.

Why would someone choose decreasing term insurance over level term?

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People choose decreasing term insurance to match a declining financial obligation, such as a mortgage. It is often cheaper than level term and ensures coverage is proportionate to outstanding debt, making it suitable for those focusing on specific liabilities.

Are premiums the same for level and decreasing term insurance?

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No, decreasing term insurance usually has lower premiums because the death benefit reduces over time. In contrast, level term insurance maintains a constant payout, often leading to higher premiums due to the unchanging risk to the insurer.

Which option is better for protecting my mortgage, level or decreasing term insurance?

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For mortgage protection, decreasing term insurance aligns better, as its payout diminishes alongside the loan balance. However, level term insurance may be preferable if you want a fixed payout that could cover other expenses besides the mortgage.

Can I convert my decreasing term policy into a level term policy?

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Most decreasing term policies do not offer conversion to level term, as their structures serve different purposes. Some level term policies, however, may allow conversion to permanent insurance, offering greater flexibility for future needs.

Do level term and decreasing term cover the same duration?

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Yes, both types can be purchased for similar term lengths, such as 10, 20, or 30 years. The difference lies in the payout structure, with level term offering consistent coverage, while decreasing term reduces over time.

Is decreasing term life insurance worth it if I have no mortgage?

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Decreasing term insurance is specifically designed for debts that decline over time, like a mortgage. Without such debts, level term is more versatile and ensures broader financial protection for your dependents.

Do beneficiaries receive the full payout with decreasing term life insurance?

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Beneficiaries receive the remaining payout when the insured dies under a decreasing term policy. The benefit reduces over time, so they will only receive what is left at the time of death, unlike level term, which guarantees a fixed sum.

Which is more cost-effective, level term or decreasing term insurance?

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Decreasing term insurance is typically cheaper because the insurer’s risk decreases over time as the death benefit shrinks. Level term, while more expensive, guarantees a fixed death benefit throughout the policy, offering more comprehensive coverage.

Can I renew or extend my level or decreasing term insurance?

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Both level term and decreasing term policies may offer renewal options, but premiums could increase significantly. With decreasing term, the payout continues to shrink, while level term maintains its death benefit, potentially providing better long-term value if extended.

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Features
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Convertible Term Life Insurance Policy
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Waiver of Premium Rider in Term Insurance
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What is Direct Term Life Insurance?

Disclaimer

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  • This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
  • All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
  • Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.

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