What is Decreasing
Term Insurance
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Decreasing Term Insurance

Decreasing term insurance works on the basis of decreasing your term life cover up to a percentage every year ultimately decreasing your sum assured. Such plans are usually purchased to help clear debts, such as home loan, car, student loan repayment.

As your loan decreases over time, so does the amount of your insurance coverage. If you're steadily paying off your mortgage, your dependents would need less money to cover the remaining amount in the event of your death.

Decreasing term life insurance differs from standard term insurance in one significant element - the coverage amount of the plan reduces over time. Hence the name decreasing term insurance.

Understand Decreasing Term Life Insurance Plans

Decreasing term insurance plans operate similarly to regular term insurance. Under decreasing term insurance, the life cover in the policy decreases annually at a specific rate. But please note that your premiums will remain constant throughout the policy term. Similar to term insurance, you can decide the policy tenure. But you'll find the premium rates for the plans are relatively lower than regular-term plans.

Let's understand with an example:

  • Varun buys a decreasing term insurance of Rs. 1 Cr and sets the decreasing rate at 5% per year.
  • Varun dies due to a road accident during the 4th year of the policy term.
  • In this case, the death benefit his family will get is Rs. 80 Lakhs, i.e., 1 Cr less 20%.

Why Buy a Decreasing Term Life Insurance Plan

Does passing on the liabilities to your dependents scare you? If yes, you can prevent it with a decreasing term insurance. It is an ideal term plan designed to cover liabilities specifically.

If you've got an outstanding home or car loan, this plan ensures that your family will not be financially burdened with debts after you pass away. With decreasing term insurance, as you pay your loans, your life cover in the policy decreases annually at a specific rate.

How Does Decreasing Term Insurance Work

While the face value of a standard Term Life Insurance policy remains constant throughout the policy tenure, the Death Benefit decreases either monthly or annually in case of Decreasing Term Insurance. However, in both these cases, the premium and the policy term remain constant.

  1. Choose Coverage Amount

    Choose a cover amount depending on the outstanding liability that your family might need to pay off upon your death.

  2. Decreasing Sum Assured

    The sum assured then reduces each year in line with an outstanding debt for the duration of the policy, eventually finishing at zero by the end of the policy term. As and when the debt becomes zero, the sum assured becomes zero.

  3. Premium Payment

    In return for the coverage, policyholders are required to pay a monthly premium to the insurance provider. Please note that the premium amount remains standard and reflects the policy's overall cost from start to end.

Benefits of Decreasing Term Insurance

  • Protection against Debts

    The primary use of decreasing term insurance is personal asset protection. It can help ensure that your beneficiaries receive enough money to pay the remaining portion of the debt after you pass away.
  • Small Business / Startup Costs

    Small business / Startups / Partnerships also use a Decreasing Term life policy to protect indebtedness against startup costs and operational expenses.
  • Premium Affordability

    Decreasing-Term Life Insurance is often much cheaper than standard Term policies. It could be right for you if you're on a tight budget but still want to protect your loved ones from financial problems if you pass away. Because the payout amount falls over time, Decreasing-Term policies usually cost less than similar standard coverage.
  • Tax Benefits

    A Decreasing Term Insurance plan, like other Life Insurance plans, provides Tax Benefits under Section 80C of the Income Tax Act. Moreover, the Death Benefit received under the plan is also tax-free under Section 10(10D) of the Act.

How Much Cover Do I Need in Decreasing Term Life Insurance

When calculating the amount of decreasing term insurance, you need to assess the outstanding liability that your family might need to pay off upon your death. Remember that the amount of life cover does not reduce at a rate faster than the outstanding debt, or else it defeats the objective of a decreasing term insurance plan.

It is essential to accurately estimate the coverage amount rather than just guessing a randomly high figure. Ideally, the cover amount should be higher than or as close to the debt amount as possible to eliminate the possibility of incurring additional charges.

When Should I Purchase a Decreasing Term Insurance Plan

Decreasing term life offers security for decreasing expenses. When you hold an outstanding loan that'll decrease over time, such as a student loan, home loan, business loan, or car loan, decreasing term life offers timely security in case your unfortunate demise and your debt is passed on to dependents. Startup owners find this plan helpful to protect indebtedness against operational expenses.

For instance: when one partner dies, the life cover from the policy can help fund continuing operations or eliminate the percentage of the outstanding debt for which the deceased partner is responsible.

Who Should Buy the Decreasing Term Insurance

Decreasing term insurance is ideal if you want to buy specifically to cover liabilities. Under this plan, you'll ensure that your family may not be burdened financially with outstanding debts that are not settled while you're alive. For anyone who holds any outstanding liabilities, like home, care student, or mortgage loans, then this plan will be best for them.

Decreasing Term Insurance Versus Other Types of Term Insurance Policies

Factors Decreasing Term Insurance Standard Term Insurance Increasing Level Term
Sum Assured Sum Assured decreases over time Sum Assured remains constant throughout the policy term Sum Assured increases at regular intervals
Who should buy it? Ideal for those who wish to cover debts/mortgages or expect their financial obligations to decrease with time Ideal for those looking for regular source of income after the Life Assured's death Ideal for those who expect financial responsibilities to increase with time


Since the main objective of buying life insurance is to protect the family's financial future, with decreasing term life insurance, you can ensure that your family will have enough financial support to pay off outstanding debts. If the thought of passing liabilities to your family scares you, then decreasing term life insurance is an ideal financial tool to cover liabilities.

Decreasing Term Insurance : FAQs

1. Why are Decreasing Term policies cheaper?

Sum insured decreases over time, as a result of which monthly premiums tend to be much lower for Decreasing-Term Life Insurance policies.

2. Can I get Critical Illness Cover with Decreasing-Term Life Insurance?

As with all types of Life Insurance policies, it's possible to add Critical Illness cover to a Decreasing-Term policy. However, as per the inclusion of the rider, the premiums will increase.

3. What are the cons of Decreasing Term Insurance cover?

  • The amount your policy pays out will decrease with time. This means that if you're towards the end of your term, you'll still be paying the same premiums – but for a lesser reward.
  • Because the value of your policy steadily falls to zero, if you survive the Policy Term, there's no chance of a payout when it matures.

4. Can I cancel my policy if I no longer need it?

Generally, a grace period of 30 days from the date of policy issuance is associated with any Term Insurance policy. If you decide to cancel the policy during this period, you are liable to receive the premium payment back.

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Naval Goel

Reviewed By: Naval Goel

Naval Goel is the CEO & founder of PolicyX.com. Naval has an expertise in the insurance sector and has professional experience of more than a decade in the Industry and has worked in companies like AIG, New York doing valuation of insurance subsidiaries. He is also an Associate Member of the Indian Institute of Insurance, Pune. He has been authorized by IRDAI to act as a Principal Officer of PolicyX.com Insurance Web Aggregator.