Understanding Decreasing Term Life Insurance

Decreasing term life insurance provides a death benefit that reduces over time, typically matching the declining balance of a mortgage or loan. Premiums remain level, but coverage decreases annually - making it cost-effective for specific debt protection purposes.

In Canada, decreasing term is most commonly sold as mortgage life insurance through banks and credit unions. While it serves a purpose, understanding its limitations compared to level term insurance is crucial for making informed protection decisions.

How Decreasing Term Works

Coverage Structure

• Death benefit decreases monthly or annually
• Premium stays the same throughout the term
• Coverage typically reduces to zero at term end
• Decrease rate mirrors mortgage amortization schedule

Example: $400K 25-Year Decreasing Term

• Year 1: $400,000 coverage
• Year 10: ~$280,000 coverage
• Year 20: ~$120,000 coverage
• Year 25: $0 coverage (policy ends)

Decreasing Term vs Level Term for Mortgages

Feature	Decreasing Term (Bank)	Level Term (Individual)
Coverage Over Time	Decreases with mortgage	Stays level
Premium Cost	Often higher per dollar	Usually lower overall
Beneficiary	The bank/lender	Your choice
Portability	Tied to that mortgage	Fully portable
Underwriting	Often post-claim	At application
Flexibility	Limited	Full control

Bank Mortgage Insurance Warning

Bank-sold mortgage insurance is decreasing term, but often more expensive and with significant limitations:

Post-Claim Underwriting: Banks often verify health information only at claim time. If there's any discrepancy, your family's claim can be denied after years of premium payments.
Decreasing Value: You pay the same premium for less coverage each year. With level term, your family receives the full benefit and chooses whether to pay off the mortgage.
No Portability: If you refinance, switch lenders, or pay off your mortgage early, bank insurance typically ends - with no refund and no ability to continue coverage.

Cost Comparison: Real Numbers

Scenario: $400,000 Mortgage, 35-Year-Old Non-Smoker

Bank Decreasing Term (25 years)

• Monthly premium: $68
• Total 25-year cost: $20,400
• Average coverage: ~$200,000
• Cost per $1K average coverage: $102

Individual Level Term (20 years)

• Monthly premium: $42
• Total 20-year cost: $10,080
• Coverage: $400,000 (constant)
• Cost per $1K coverage: $25

Result: Level term provides 2x more average coverage for 50% less total cost, plus you choose the beneficiary and the policy is fully portable.

When Decreasing Term Actually Makes Sense

Specific debt protection with known payoff date (car loan, LOC)

Business loan with fixed amortization schedule and no other use for proceeds

Budget is extremely tight and no other coverage is affordable

You have no other coverage needs beyond that specific debt

Short-term obligation with defined end date (5-year term loan)

Supplementing existing level coverage during high-debt years

The "Equity Gap" Problem

One major issue with decreasing term that's often overlooked: as your mortgage decreases, your home equity typically increases. With bank mortgage insurance:

Year 1

$400K coverage

$400K mortgage, $0 equity

Year 10

$280K coverage

$280K mortgage, $120K+ equity

Year 20

$120K coverage

$120K mortgage, $280K+ equity

The Problem: Bank insurance pays off the mortgage only. With level term, your family receives the full $400K - they can pay off the mortgage AND keep the equity (or choose not to pay off a low-interest mortgage and invest the proceeds instead).