Decreasing Term Insurance

Decreasing term insurance works by reducing your term life cover by a certain percentage each year, ultimately decreasing your sum assured. These plans are typically purchased to help clear debts like home loans, car loans, or student loan repayments.

As your loan decreases over time, so does your insurance coverage. If you are 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 aspect: the coverage amount of the plan reduces over time. Hence its name, decreasing term insurance.

Understand Decreasing Term Life Insurance Plans

Decreasing term insurance plans operate similarly to regular term insurance. With decreasing term insurance, the life cover decreases annually at a specific rate. However, your premiums will remain constant throughout the policy term. Similar to term insurance, you can decide the policy tenure. You will find that the premium rates for these plans are relatively lower than regular term plans.

Let's understand with an example:

• Varun buys a decreasing term insurance of Rs. 1 Crore 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 receive is Rs. 80 Lakhs (i.e., 1 Crore less 20%).

Why Buy a Decreasing Term Life Insurance Plan?

Concerned about leaving liabilities to your dependents? If so, decreasing term insurance can prevent it. It is an ideal term plan specifically designed to cover liabilities.

If you have 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 repay 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 the 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 reaching zero by the end of the policy term. As the debt becomes zero, the sum assured also becomes zero.

3. Premium Payment

   In return for the coverage, policyholders are required to pay a monthly premium to the insurance provider. The premium amount remains constant throughout the policy term, reflecting the policy’s overall cost.

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 businesses, startups, and partnerships also use a Decreasing Term life policy to protect against indebtedness from 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 are 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 should not reduce at a rate faster than the outstanding debt, as this would defeat 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. If you have an outstanding loan that will decrease over time, such as a student loan, home loan, business loan, or car loan, decreasing term life provides timely security in case of your unfortunate demise, preventing your debt from being passed on to dependents. Startup owners find this plan helpful to protect against indebtedness from operational expenses.

For instance, if 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 Decreasing Term Insurance?

Decreasing term insurance is ideal if you want to buy it specifically to cover liabilities. This plan ensures your family will not be financially burdened with outstanding debts if you pass away. For anyone who holds outstanding liabilities, such as home, car, student, or mortgage loans, this plan will be beneficial.

Decreasing Term Insurance Versus Other Types of Term Insurance Policies

Conclusion

Since the main objective of buying life insurance is to protect the family’s financial future, decreasing term life insurance ensures your family will have enough financial support to pay off outstanding debts. If you are concerned about passing on liabilities to your family, decreasing term life insurance is an ideal financial tool to cover those debts.