What is Decreasing
Term Insurance
  • Coverage against debt obligations
  • No Pre-medical Checkups
  • Compare Decreasing, Increasing & Level Term Insurance
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Decreasing Term Insurance

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.

Cover your Family by term insurance Cover your Family by term insurance

How does it 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

    Depending on the amount of mortgage that your family might need to pay off upon your death, choose a cover amount.

  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, Sum Assured becomes zero alongside.

  3. Premium Payment

    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.

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Benefits of Decreasing Term Insurance

  • Protection against Debt Obligations The major use of Decreasing Term Insurance is personal asset protection. If you are searching for Life Insurance to cover debts, loans or financial obligations, then Decreasing Term Life insurance can be a tool to cover obligations that decrease over a fixed period of time. A Decreasing Term policy can help ensure that your beneficiaries receive enough money to pay the remaining portion of the debt after you pass away. These could be mortgage loans, auto loans, personal loans and / or business loans.
  • 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.
  • No Pre-medical Checkups You don't need to pass a medical exam to buy the policy. It's a way to help guarantee that you have the funds needed to cover a debt if you pass away and not pay for more Insurance than you actually need. Plus, those in poorer health may still be able to obtain the loan.
  • 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?

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.

Who Should Buy it?

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.

Decreasing Term Insurance Versus Other Types of Term Insurance Policies

FactorsDecreasing Term InsuranceStandard Term InsuranceIncreasing Level Term
Sum AssuredSum Assured decreases over timeSum Assured remains constant throughout the policy termSum 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 timeIdeal for those looking for regular source of income after the Life Assured's deathIdeal for those who expect financial responsibilities to increase with time

What is 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.

What Our Customers Have to Say

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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.