Decreasing term insurance is a policy whose death benefit shrinks on a published schedule while the premium stays the same, most often designed so the shrinking benefit tracks the declining balance of a mortgage. It is sold under names like mortgage protection insurance, mortgage life insurance and mortgage redemption insurance, and a closely related version, credit life insurance, is sold at the point of a loan closing.
The decision this page is built around is narrow and immediate: should you keep paying for it? For a great many people over 65 the answer is no, and for a specific minority the answer is a firm yes. Getting to the right answer takes about fifteen minutes and two phone calls, and the most common outcome of those calls is discovering you have been paying for years to insure a debt you no longer owe.
What this page will not do is pretend a decreasing term policy is a hidden asset. It is almost never sellable, and saying so plainly is more useful than a maybe. Education only, not insurance advice; your policy schedule governs.
In This Article
The Mechanics, and What the Schedule Actually Looks Like
Take a $200,000 mortgage taken out at 4 percent over 30 years. The monthly payment is roughly $955. After 20 years of payments the remaining balance is about $94,000, because early payments are mostly interest and principal reduction accelerates late.
A decreasing term policy sold alongside that loan is designed so its death benefit falls along a similar path: about $200,000 at the start, roughly $94,000 twenty years in, and near zero at year 30. The premium, meanwhile, is level for the whole 30 years.
That means the cost per dollar of coverage rises continuously. In year one you are paying for $200,000 of protection. In year 25 you are paying the same amount for something in the range of $50,000. Whether that is a bad deal depends on the price, but it is certainly a different deal than the one people remember buying.
Two things to locate in your own policy: the schedule of benefits, which is a table showing the face amount for each policy year, and the expiry date. Both are in the contract, and the carrier will send a duplicate on request. Decreasing term generally has no cash value, no cash surrender value to recover, and no nonforfeiture benefit, so if you stop paying, the coverage simply ends after a grace period, commonly about 31 days.
Credit Life Insurance: The Version Sold at the Loan Desk
Credit life insurance is decreasing term sold by or through a lender, usually at closing, with the lender named as beneficiary so the proceeds pay the debt directly. It is typically issued on a group certificate with little or no individual underwriting, which is its one genuine advantage: someone in poor health can often get it when they could not buy individual coverage.
Its economics have drawn regulatory attention for decades. Because it is sold at a moment when the borrower is focused on the loan rather than the insurance, and because the seller earns a commission, state regulators set minimum loss ratio standards for credit insurance, meaning a required minimum share of premium that must be returned to consumers as benefits. The NAIC’s model regulation on consumer credit insurance and state credit insurance statutes set those benchmarks, commonly in the range of 50 to 60 percent depending on the state and the coverage type. A product needing a regulatory floor to keep its payout ratio reasonable is a product to examine carefully.
Two practical points. Credit life is generally voluntary. Federal lending rules require that voluntary credit insurance be disclosed as optional and that the borrower affirmatively request it, and if a lender conditioned a loan on buying it, that is a matter for your state department of insurance or the Consumer Financial Protection Bureau. And credit life usually terminates when the loan is paid off or refinanced, which is why some people are paying for a certificate covering a loan that no longer exists.
| Policy year | Approximate mortgage balance, $200,000 at 4% over 30 years | Approximate death benefit | Premium |
|---|---|---|---|
| 1 | About $196,000 | About $200,000 | Level |
| 10 | About $158,000 | About $158,000 | Level, unchanged |
| 20 | About $94,000 | About $94,000 | Level, unchanged |
| 25 | About $55,000 | About $55,000 | Level, unchanged |
| 30 | $0 | $0, policy expires | Payments stop |
The Decision: Six Questions, Two Phone Calls
Answer these in order. Most people reach a decision at question three.
- Do you still owe the debt? Call the lender and confirm the current balance. If the mortgage is paid off, refinanced, or the property is sold, the policy may be insuring nothing, and in the case of credit life it may already have terminated while you kept paying.
- Who receives the money? On credit life, the lender does, and your heirs get a paid-off debt, not cash. On individual mortgage protection insurance you name the beneficiary and they receive cash, which they may use for anything. Very different products; check the beneficiary designation.
- What is the death benefit today? Not at issue, today. Pull the schedule of benefits or call the carrier.
- What is the annual premium per thousand dollars of current coverage? Divide the annual premium by the current face amount in thousands. Compare that figure to a quote for level term or a small permanent policy. If you are healthy, the comparison often favors replacing it, but never cancel until replacement coverage is issued and delivered.
- Would anyone actually be hurt financially by your death? A surviving spouse whose income drops, a co-signer on the loan, an adult child living in the house. If the honest answer is no, the coverage has no job.
- Is the premium coming out of money you need? If so, this is one of the easier expenses to cut, because there is no accumulated value to forfeit.
If the coverage still has a job, keep it. If it does not, stopping is a legitimate decision and not a loss.
The Products It Is Confused With
Level term. Death benefit stays the same, premium stays the same for the term. Usually convertible, which is what gives term policies value in the secondary market. See how level term works.
Annual renewable term. Death benefit stays the same, premium rises every year at attained age. Structurally the opposite of decreasing term. See how annual renewable term works.
Extended term insurance. A nonforfeiture option on a whole life policy, in which existing cash value buys paid-up term coverage with no further premium. The name is close enough to cause confusion and the product is entirely different. See what extended term insurance is.
Mortgage protection versus mortgage insurance. Private mortgage insurance and FHA mortgage insurance premiums protect the lender against default and pay nothing on death. Mortgage protection life insurance pays on death. Borrowers conflate them constantly and sometimes pay for both without knowing.
Final expense insurance. Small permanent whole life with a level death benefit and cash value, meant for funeral costs. If your goal is leaving something to cover a burial, that is a different product; see what final expense insurance is.
The Honest Answer About Selling One
Almost never. Four reasons, each independently sufficient.
The face amount is falling. A buyer values the death benefit that will be payable at the insured’s death, which on a decreasing term policy is smaller every year and eventually zero.
It usually expires before life expectancy. A policy scheduled to end at the mortgage’s payoff year pays nothing after that date, and buyers need a policy that will be in force when the insured dies.
There is generally no conversion right. Term policies become sellable when they can be converted to permanent coverage without new underwriting. Mortgage protection and credit life products typically have no conversion privilege at all. Without it, there is no path to a permanent contract a buyer could hold.
The remaining face amount is usually small. Institutional buyers concentrate on face amounts above roughly $100,000, and a decreasing term policy late in its schedule is often well below that.
The realistic paths for a decreasing term policy are three: keep it because someone still depends on the benefit, replace it with better coverage if you are healthy and still need protection, or stop paying because it no longer has a job.
Where a valuation does make sense is if you also own a different policy, a whole life or universal life contract with a level death benefit, that has been quietly running alongside this one. That is the policy worth pricing. Federal GAO work published in 2010 (GAO-10-775) found sellers typically received roughly 10 to 35 percent of face value, with offers concentrated on insureds generally over 65 whose health has declined. Our page on whether a term policy can be sold explains the conversion test that decides it.
A free policy review will tell you in writing which of your policies, if any, has value, and will say so plainly when the answer is none. Pine Lake Legacy does not purchase policies and provides education only. Call (732) 978-9575 with the policy cover pages.
Frequently Asked Questions
Does the premium go down as the coverage shrinks?
No. That is the defining feature of the product: the death benefit declines on a published schedule while the premium stays level for the whole term, so the cost per dollar of coverage rises every year. Pull your schedule of benefits, which lists the face amount for each policy year, and check what you are actually insuring today.
Who gets the money when I die?
It depends which product you have. On credit life insurance sold through a lender, the lender is the beneficiary and the proceeds pay off the debt directly, so heirs receive a cleared loan rather than cash. On individually owned mortgage protection insurance, you name the beneficiary and they receive cash to use as they choose.
Can I sell a decreasing term policy?
Realistically no. The death benefit shrinks each year, the policy usually expires before life expectancy, there is typically no conversion right to permanent coverage, and the remaining face amount is usually well below the roughly $100,000 threshold buyers look for. A different policy you own, with a level death benefit, may be worth valuing instead.
My mortgage is paid off. Should I cancel?
Check two things first. Confirm with the lender that the loan is closed, and confirm with the insurer whether a credit life certificate already terminated when the loan was satisfied, since some people keep paying after coverage ends. If you own the policy individually and someone still depends on the death benefit, keeping it may still make sense.
Is mortgage protection insurance the same as private mortgage insurance?
No, and the confusion is common. Private mortgage insurance and FHA mortgage insurance premiums protect the lender against your default and pay nothing when you die. Mortgage protection life insurance pays a death benefit. Some borrowers pay for both without realizing they serve entirely different purposes. Check your closing documents and your monthly statement.
Should I replace it with level term instead?
If you are in reasonable health and still need coverage, comparing quotes is worth fifteen minutes, because a level death benefit at a fixed premium is usually a better structure. Never cancel existing coverage until replacement coverage has been issued and delivered, since underwriting can change the offer or decline it outright.
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Related Reading
- What Is Level Term Life Insurance
- What Is Annual Renewable Term Insurance
- What Is Extended Term Insurance
- What Is Final Expense Insurance
- Can I Sell A Term Life Insurance Policy
- What Is Cash Surrender Value
- What Is Cost Of Insurance
Pine Lake Legacy does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.