Certain monetary liabilities of people decrease with time and the logic behind the decreasing term insurance policy is the same. Let us understand details about this policy and its features, in this post.
When you are young with a family of dependents to look after, you have more liabilities as compared to when you are old and your kids are working and settled. As your liabilities decrease, your requirement of term insurance also decreases. Here, the decreasing term insurance policy comes into feature.
Let us understand the policy better.
Decreasing Term Insurance Meaning
As discussed above, in the decreasing term insurance policy the coverage amount reduces with time. This policy was introduced with the idea that people’s needs for insurance decrease with age and time. These policies are different from the standard policies because the coverage amount in decreasing term insurance lessens over time.
Let’s understand the decreasing term life insurance definition with the help of an example, suppose you have taken a loan and it needs to be repaid in 20 years. Now, if any untoward situation leads to your demise, your family members might get burdened with the loan amount along with other financial liabilities. So, in this case the Decreasing Term Insurance policy would come to the rescue of the family in paying off the mortgage. As the mortgage repayment amount decreases with time, thus the coverage amount received would also decrease accordingly.
How does Decreasing Term Insurance work??
In case of Decreasing Term Insurance, the value of death benefit received by the nominee of the policyholder decreases either monthly or annually. However, this value remains constant in case of standard life insurance policy along with constant premium amount.
- Coverage Value – The coverage amount of a Decreasing Term Insurance can be chosen by the policyholder depending on the exact requirement for which the policy is purchased. So, looking at the need of the death benefit that the nominee would have in case of sudden demise of the policyholder, the sum assured can be decided.
- Decreasing Coverage – In case of Decreasing Term Insurance, the sum assured of the policy decreases with every passing year depending on the tenure of the policy. By the end of the policy term, the Decreasing Term Insurance becomes zero, thereby making the sum assured zero as well.
- Premium Amount – The monthly premium paid by the policyholder in return of the sum assured remains standard and shows the overall charges levied under the policy from the initial time till end
For instance, suppose you bought a Decreasing Term Insurance plan with 20 years tenure and a sum assured of INR 20 lakh. Now, assume that you have a home loan going on with INR 20 lakh to repay. God forbid, if anything happens to you during the term of the repayment period, your family would receive the sum assured to repay the debt.
Let say, the sum assured of the policy decreases by 5% with simple ROI. Hence, from the end of the first policy year, the SI of the policy would come down by INR 1 lakh every year. As you continue to pay off the debt for the first 10 years of the plan, a corresponding amount reduces from the sum assured. Now, in case anything happens to you at the 10th year of the policy, your family would receive INR 10 lakh as total death benefit under the Decreasing Term Insurance that can be used to pay off the remaining loan amount.
What are the Advantages of Decreasing Term Insurance?
- Offer security against debt – The decreasing term insurance is primarily used to secure personal assets against debt repayment. In case you have a major debt, loan etc. and you want to secure your family against that debt, the Decreasing Term Insurance serves as the best tool. This policy covers obligations that reduce over a fixed time period. With this policy in hand, the beneficiaries would not have to worry about repayment of a debt after the head earning member of the family passes away.
- Provide against startup indebtedness – The Decreasing Term Insurance also serves as the best protection against a loan or debt taken for a start-up business. So, this policy covers you against indebtedness initiated to meet the expenses of a startup business.
- Affordable Premium – The premium amount of most decreasing term insurance policies are way less as compared to the standard term plans. So, this policy suits well for people surviving with a tight budget. Since the payout amount of Decreasing Term Insurance reduces over time, the cost of the policy premium is also low.
- No medical examination required – Another best benefit of the Decreasing Term Insurance is that it doesn’t require the policyholder to go through any medical examination before buying the policy. Since this policy is generally purchased to pay off debts in case of death of the policyholder, thus it allows anyone in any health condition to obtain the policy.
- Tax benefits received – Like other life insurance policies, the Decreasing Term Insurance also allows saving on taxes under section 80C of income tax. Even the amount received as death benefit is tax free as per section 10D of income tax.
How Do I Assume How Much Cover I Need?
This can be analyzed by the amount of debt, loan or mortgage that is due on you along with the interest levied on the debt. You have to make sure that the sum assured of the Decreasing Term Insurance policy doesn’t go down at a faster rate as compared to the outstanding loan amount. In that case, the purpose of the policy would not meet.
Hence, it needs careful analysis while deciding the coverage amount of a Decreasing Term Insurance. You must calculate the debt amount accurately so that you can estimate the required coverage amount. Preferably, the coverage amount of the policy should be either equal to or higher than the total loan amount.
Decreasing Term Insurance VS. Other Term Insurance/span>
Below are some differences between level term vs. decreasing term life insurance offered by insurance companies:
|Factors||Decreasing Term Insurance||Standard Term Insurance||Increasing Term Insurance|
|Sum Assured (SI)||The SI, in this case, decreases with time||The SI stays constant across the tenure of the policy||The SI increases at intervals|
|Eligibility (Who should buy)||Suits people who have debts or loans to pay off and the amount is likely to decrease with time||Suits people looking for a regular income source for family after his/her death||Suits people whose financial obligation is likely to increase over time|
To Sum Up
Decreasing Term Insurance is an ideal plan for people with debts as the decreasing term life insurance cash value goes down with time. Thus, anyone with a specific amount of debt/loan should buy a Decreasing Term Insurance. With this policy in hand, you can be sure that no burden will befall your family members in case you die before paying off the entire debt amount.
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