Decreasing Term vs. Level Term: Which Is Better for Mortgage Protection?

Short answer: In the decreasing term vs. level term choice, decreasing term gives a death benefit that shrinks over the years, roughly in step with your mortgage balance. Level term pays the same amount for the whole term, so if you die, your family can pay off what’s left of the loan and keep the rest. Decreasing term often costs less. Level term gives your family more money and more choices.

What is decreasing term life insurance?

Decreasing term is a kind of term life insurance where the death benefit gets smaller over the policy period. The New York State Department of Financial Services (DFS) explains that “with decreasing term the face amount reduces over the period,” while “the premium stays the same each year.” DFS notes that these policies are often sold as mortgage protection.

The idea is simple. As you pay down your mortgage, you owe less, so the coverage shrinks too. If you die during the term, the payout is meant to be roughly enough to clear the remaining balance.

The schedule the benefit follows is set by the policy, not by your actual loan. That matters if you refinance, pay extra or take out a home equity loan.

What is level term life insurance?

With level term, the death benefit doesn’t change. DFS says that “under a level term policy the face amount of the policy remains the same for the entire period.” Most level term policies also keep the premium the same for the term. The Texas Department of Insurance (TDI) says term premiums “will stay the same for the entire term” and “go up if you renew at the end of the term.”

You can choose a level term amount close to your mortgage balance and a term close to the years left on the loan. TDI notes that many people choose term life “to last until their children turn 18 or until their mortgage is paid off.”

Because the benefit doesn’t shrink, the gap between what you owe and what the policy pays grows over time. Late in the loan, most of the payout may be money your family can use for other needs.

How do decreasing term and level term compare?

Product details vary by insurance company and state, so check the actual policy terms.

Who is decreasing term a good fit for?

Decreasing term can make sense if:

• Your main goal is making sure the mortgage can be paid off, and nothing more.
• You already have other life insurance for income replacement or other debts.
• Budget is tight and you want the lowest-cost way to cover the loan.

The trade-off is that your family’s other costs don’t shrink along with the loan. Childcare, college, car payments and everyday bills may still be there.

Who is level term a good fit for?

Level term is often the better fit if:

• Your household depends on your income, not just for the mortgage.
• You want your family to decide whether to pay off the loan or keep it and use the money elsewhere.
• You might refinance, move or take on a home equity loan before the term ends.

Level term sized to the loan can give similar protection with more room to adapt. For a broader comparison, see whether mortgage protection or term life is the better choice.

What is return of premium mortgage protection?

Some insurance companies offer a return-of-premium version of a term policy, or a rider you can add. In general, if you outlive the term and have kept the policy in force, some or all of the premiums you paid come back to you. Details vary by insurance company and state.

Before you choose it, ask:

• How much more does it cost than the same policy without the feature?
• What happens if you cancel early or the policy lapses? With many versions, you may get back only part of what you paid, or nothing, if you stop before the end of the term. Ask for the refund schedule in writing.
• Does it apply to the whole premium or only part of it, such as the base policy but not other riders?

Return of premium typically costs noticeably more than the same coverage without it. Whether that trade is worth it depends on how sure you are that you’ll keep the policy for the full term.

How is this different from PMI or lender credit life?

Neither decreasing nor level term is the mortgage insurance your lender may require. The Consumer Financial Protection Bureau (CFPB) says mortgage insurance “protects the lender – not you – in the event that you fall behind on your payments.” It doesn’t pay off your loan when you die. (Learn more about what mortgage protection insurance is and how it differs from PMI.)

Credit life insurance is also different. TDI says credit life “pays the balance of a loan if you die before the loan is paid off,” and DFS says it “generally pays the outstanding balance of the debt at the time of the borrower’s death.” With an individual decreasing or level term policy, the money usually goes to the beneficiary you name, who decides how to use it. TDI adds: “If you already have life insurance, you might not need credit life.”

A mortgage protection policy is an optional purchase. It isn’t a condition of the loan you already have.

Questions to ask before you choose

1. Does the benefit stay level or decrease? If it decreases, on what schedule, and how does that compare with my loan’s payoff schedule?
2. Who receives the money? My named beneficiary, or the lender?
3. How long does coverage last, and does it match the years left on my mortgage?
4. Is the premium fixed for the term? What would it cost to renew? The National Association of Insurance Commissioners (NAIC) says to “ask what the premiums will be before you renew the policy.”
5. Can I convert to permanent coverage? DFS says convertible term “often” permits exchanging the policy for a permanent plan, and you don’t have to give health information if you convert within the set period.
6. Is return of premium included, and what happens to the refund if I cancel early?
7. What riders are included, such as living benefits, and what does each add to the cost?
8. How long is the free-look period? TDI says Texas policies have one of “at least 10 to 20 days,” and the NAIC says it’s “usually 10 days.”
9. Am I comparing similar coverage? TDI advises: “Don’t choose a policy on price alone,” because “a less expensive policy could have fewer features or a lower death benefit.”

If you’re replacing coverage, the NAIC says: “Don’t cancel your current policy until you get the new one.” For a closer look at what drives the price, see how much mortgage protection insurance costs.

A licensed agent can compare decreasing and level options against your loan balance, age and existing coverage. Here’s how calling RestAssured works.

RestAssured is not a lender, an insurance company or an insurance agency, and isn’t affiliated with any mortgage lender or servicer. RestAssured connects callers with independently licensed insurance agents.

Frequently asked questions

What is decreasing term life insurance?

Decreasing term is term life insurance whose death benefit gets smaller over the policy period while the premium stays the same. It is often sold as mortgage protection because the benefit shrinks roughly in step with a loan balance.

Is level term or decreasing term better for a mortgage?

Decreasing term can fit if your only goal is covering the loan. Level term keeps the same benefit for the whole term, so your family gets whatever is left after paying off the mortgage, which can give your family more flexibility.

Is decreasing term cheaper than level term?

Decreasing term often costs less than level term for the same starting coverage, because the insurance company’s risk shrinks over time. Prices vary by insurance company, age, health and state.

What is return of premium mortgage protection?

Return of premium is a version or rider some insurance companies offer that refunds some or all of the premiums if you outlive the term. It typically costs more, and canceling early may mean getting back only part of what you paid, or nothing, so read the policy’s terms.

Is mortgage protection the same as PMI?

No. The Consumer Financial Protection Bureau says mortgage insurance protects the lender if you fall behind on payments. Mortgage protection is life insurance that pays a death benefit if you die during the term.

Sources

• Types of life insurance policies, New York State Department of Financial Services
• Life insurance guide, Texas Department of Insurance
• Consider life insurance to protect your loved ones, Texas Department of Insurance
• What is mortgage insurance and how does it work?, Consumer Financial Protection Bureau
• Life Insurance Buyer's Guide, National Association of Insurance Commissioners

This article is for general education. Policy features, prices and eligibility vary by insurance company and state; your agent will explain the specific terms of any policy before you apply.