Declining Balance

Example

“The mortgage protection policy had a declining balance feature that reduced the death benefit from $300,000 to match the homeowner's remaining loan balance each year.”

Memory Tip

Picture a balance scale that tips more each year - as your debt goes down on one side, your insurance coverage declines on the other side to maintain balance.

Why It Matters

Declining balance policies typically cost less than level benefit policies because the insurance company's risk decreases over time. This makes them attractive for covering specific debts like mortgages that naturally decrease with payments.

Common Misconception

People often assume declining balance means declining quality or value, but these policies are specifically designed to match decreasing financial needs. The premium usually stays level while coverage declines, which is actually cost-efficient for the intended purpose.

In Practice

A 30-year mortgage protection policy might start with $250,000 coverage when the mortgage balance is $250,000. After 10 years of payments, when the mortgage balance drops to $180,000, the insurance coverage also declines to $180,000. The monthly premium remains constant at $45, but the policyholder pays less per dollar of current debt coverage as time progresses.

Etymology

The term originates from accounting and finance, where "declining" refers to a systematic reduction and "balance" refers to the remaining amount. It was adopted by the insurance industry to describe policies that mirror decreasing financial obligations.

Common Misspellings

Related Terms

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Other insurance terms you should know

See Also