What Is Decreasing Term Life Insurance in Canada? Is It Right for You?

Decreasing term life insurance is a policy where the death benefit declines over time, either monthly or annually.

This type of term life insurance covers financial obligations that decrease over a set period, like a mortgage or car loan. But is decreasing term life insurance right for your specific needs?

This comprehensive guide examines everything you need about decreasing term insurance in the Canadian market.

What is Decreasing Term Life Insurance?

Decreasing term insurance, also known as decreasing term assurance or DTA provides a death benefit that decreases in increments over the term length of the policy. The policy term is usually between 10 to 30 years.

For example, you purchase a 20-year decreasing term policy with an initial death benefit of $500,000. In the first year, if you passed away, your beneficiary would receive a $500,000 payout. In year two, the death benefit may decrease to $480,000 and continue dropping by $20,000 each year. By year 20, the death benefit would be $0.

The premiums, however, remain level throughout the term. So, even as the death benefit decreases, you continue paying the same premium each year. This differs from level-term policies, where premiums and death benefits stay constant.

How Does Decreasing Term Life Insurance Work in Canada?

With decreasing term life insurance, you choose the initial death benefit amount, term length, and decrease frequency (annual or monthly). The death benefit decreases based on a predetermined schedule outlined in the policy.

For example, let’s look at a 25-year policy with a starting death benefit of $500,000, decreasing annually by 4%:

Year Death Benefit

So, if the insured person passed away in year 10, the beneficiaries would receive $300,000.

The premiums remain level for the entire term length. Using the above example, you would pay the same premium each year for 25 years. The premium is based on the initial death benefit amount, decrease schedule, and the insured’s age and health.

Why Choose Decreasing Term Life Insurance?

The main benefit of decreasing term insurance is covering financial obligations that reduce over time, like mortgages, car loans, student loans, and business loans. As you pay down the loan principal, the need for life insurance also decreases.

Let’s look at a typical example – using decreasing term insurance to cover your mortgage:

• You take out a $300,000 mortgage payable over 25 years
• You purchase a 25-year decreasing term policy with an initial death benefit of $300,000
• The death benefit decreases annually by $12,000 (the amount your mortgage principal decreases each year)
• If you pass away, your beneficiary receives a payout to pay off the remainder of the mortgage

In this case, a decreasing term policy matches the decreasing liability of your mortgage. This allows you to pay lower premiums than level-term insurance with the same death benefit.

Decreasing term insurance can also provide coverage if your financial responsibilities lessen over time. For example, as your kids graduate college or become financially independent.

Available Riders

Most decreasing term policies allow you to add optional riders for added benefits:

• Terminal Illness Rider: Provides an accelerated payout of up to 80% of the death benefit if diagnosed with a terminal illness.
• Critical Illness Rider: Pays out a portion of the death benefit if diagnosed with a critical illness like cancer, heart attack, or stroke.
• Waiver of Premium Rider: Waives future premium payments if you become disabled and unable to work.

These riders provide living benefits that you can access during the policy term. They usually come at an extra cost but can be valuable protections.

Decreasing Term Insurance Providers in Canada

While decreasing term insurance was previously offered by many companies, availability has declined due to a lack of consumer demand. But it is still offered by several major life insurance providers in Canada:

• Sun Life offers 10, 15, 20, and 25-year decreasing term policies. Death benefits start at $100,000.
• Canada Life offers renewable decreasing term insurance up to age 80. Coverage can decrease annually or stay level for up to 10 years.
• RBC Insurance offers a customizable policy where you choose the initial amount, frequency of decreases, and term length.
• BMO Insurance offers 10, 15, 20, 25, and 30-year decreasing terms. Includes terminal illness coverage in the base policy.
• Empire Life offers annually decreasing term insurance for up to 20 years. Death benefits start at $100,000.

When comparing providers, look at premium costs, flexibility of structuring decreases, and overall financial stability ratings. An independent broker can help you compare and find the best option.

Decreasing vs. Level Term Insurance

So when does choosing decreasing term over level term insurance make sense? Here’s a quick comparison:

Decreasing Term

• Lower premiums due to decreasing coverage
• Matches reducing debts like mortgages
• Provides less flexibility vs. level term
• Limited availability from providers

Level Term

• Death benefits and premiums remain constant
• Provides stable, fixed coverage
• More flexibility in using payout
• There is a much wider availability of options

In most cases, level-term insurance is the better option:

• It allows beneficiaries flexibility in using the payout for any purpose.
• It provides stable coverage in case future insurance needs increase.
• Premiums, while slightly higher than the decreasing term, are still affordable in the early years.
• Many more insurance companies offer it.

But, decreasing term insurance can provide adequate protection at a lower cost for precisely matching a reducing liability like a mortgage.

Is Decreasing Term Right for You? Key Considerations

When determining if decreasing term insurance fits your needs, here are some key factors to consider:

Do you have a reduced financial obligation? 

The main advantage of decreasing terms is matching declining debts. It works best if you have a mortgage, loan, or other liability that decreases over time.

How long is the obligation?

Make sure to get a policy term length that exceeds the payoff date. This provides a buffer in case you defer or extend payments.

Will your future insurance needs decrease?

Look ahead at potential changes in dependents, income, debts, etc. Make sure a declining death benefit aligns with your future responsibilities.

Do you need flexibility in using the payout?

Level-term insurance allows beneficiaries to use funds as needed while decreasing term is more limiting.

Is it available from your preferred insurer?

Decreasing term has limited availability, so ensure your top choice insurance company offers it.

How do premiums compare to level terms?

Get quotes for both decreasing and level-term policies to compare costs. Decreasing the term only makes sense if it provides significant savings.

Careful consideration of these factors will help determine whether decreasing or level term life insurance is better.

Frequently Asked Questions

What happens if I outlive my decreasing term policy?

Like all term insurance, decreasing term policies expire at the end of the term length without any cash value. So, if you outlive the policy, coverage ends. This highlights the importance of choosing an appropriate term length that adequately covers your financial needs.

Can I convert to permanent insurance?

Some providers allow you to convert your decreasing term policy to permanent insurance like whole or universal life before it expires. This allows you to continue life insurance coverage past the term length. Conversion comes with much higher premiums, so you must assess your future insurance needs and income to determine if conversion makes sense.

Can I increase my death benefit later on?

In most cases, the death benefit on a decreasing term policy cannot be increased after inception. You must apply for a new policy that undergoes full medical underwriting. It’s important to consider potential future insurance needs when initially purchasing coverage. Term life insurance in Canada is best for short-term needs, while permanent insurance provides lifetime protection.

Are premiums and death benefit guarantees subject to change?

The premiums and death benefit schedule on a decreasing term policy are contractually guaranteed at purchase. As long as you continue paying premiums, the insurer cannot increase costs or alter the decreases. However, any optional riders may allow the insurer to increase costs.

Can I stop paying premiums and reinstate the policy later?

If you stop making premium payments, the policy will lapse, and coverage will end. However, most policies have a reinstatement period where you can restore the original coverage by paying back premiums plus interest. This grace period is usually within 90 days of the first missed premium.

The Bottom Line

Decreasing term life insurance can provide affordable coverage that matches reducing financial obligations. But for most Canadians, level-term insurance is a better choice due to lower costs in the early years, the flexibility of payout, and broader availability.

Getting quotes for decreasing and level-term policies is wise when shopping for life insurance. An independent insurance broker can help you compare options from multiple providers to find the right policy for your specific needs and budget.

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