The idea behind Decreasing Term coverage is based on the fact that with age, certain financial liabilities and the need for a high life insurance cover decreases. Such plans are usually purchased to help clear debts - such as a repayment mortgage. As debt decreases over time, so does the amount of Insurance. 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 on one significant element - the coverage amount of the plan reduces over time.
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.
Depending on the amount of mortgage that your family might need to pay off upon your death, choose a cover amount.
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, Sum Assured becomes zero alongside.
In return for the cover, policyholders are required to pay a monthly premium to the Insurance Provider. Please note that the premium amount remains standard and reflects the overall cost of the policy from start to end.
Let's take an example.
Debbie purchased a 20-year Decreasing Term Life Insurance policy with a coverage amount of Rs. 20 Lakhs. She has an outstanding Home Loan of Rs. 20 Lakhs. If Debbie were to die during the first year, her beneficiaries are liable to receive Rs. 20 Lakhs in full as the Death Benefit.
However, let's assume that the Sum Assured reduces by 5% simple rate of interest. Therefore, starting from the end of the first policy year, the Sum Assured would start reducing by Rs. 1 Lakh each year.
As Debbie continues to pay away her debt installments, an equivalent sum reduces from the coverage amount. This reduction continues annually until either the policyholder passes away or the policy pays out at the end of 20 years.
Now, if Debbie were to die 10 years into the policy term, her family receives Rs. 10 Lakhs as Death Benefit, which they can use to pay off the loan amount.
Check and compare plans from 21 IRDAI-approved term insurance providers before purchasing a term plan.
When calculating the amount of Life Insurance you need, you need to analyse the mortgage amount in addition to the amount of interest that you have to pay. You should ensure that the amount of cover does not reduce at a rate faster than the outstanding mortgage debt, or else it defeats the purpose of a Decreasing Term Insurance plan.
You should be very careful as you budget for these expenses. It is important 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, so as to eliminate the possibility of incurring additional charges.
Decreasing Term Insurance is usually best-suited to those who want to cover a specific debt. With this type of cover, you can be confident that your loved ones would be able to settle debts if you were no longer around. A Decreasing Mortgage Term Insurance plan is a great option for those looking to have a stable Mortgage Repayment Insurance option that will always cover the amount in line with how much is being paid on the mortgage.
On the other hand, if you would prefer to have a policy that pays out enough to cover the mortgage and leave additional funds to cover other expenses, standard Term Life Cover should be more suitable.
|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|