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Decreasing Term Insurance

When it comes to life insurance, one cannot miss the imperative term life insurance plan which is, rightfully, the essence of life insurance. A term insurance plan promises to pay a lump sum amount in case the life insured (the person whose life risk is insured under the plan) dies during the chosen term of the plan. You, as the life insured or the policyholder, have the choice to select the Sum Assured under the plan and the tenure for which the plan would cover your life risk. A term plan, as it covers only death risk, is priced extremely low and is easily affordable. A term plan’s affordability is not the only thing which makes the plan important. The plan comes in different types too and can be taken to fulfill different needs. One such variant of a term plan is a decreasing term insurance plan. Have you ever heard about the plan?

Decreasing Term Insurance Plan

A decreasing term insurance plan is a term plan where the Sum Assured decreases every year by a fixed percentage. Other features of the plan are similar to normal term insurance plans and are as follows:

  • You can choose the original Sum Assured under the plan which then reduces every year throughout the policy tenure.
  • The choice of the plan tenure is also done by the policyholder.
  • Premiums for the plan remain the same even though the risk cover reduces.
  • Usually, at the maturity of the plan, the Sum Assured reduces to zero. Thus, decreasing term plans have no maturity benefit like normal term insurance plans.
  • On death during the term of plan, the Sum Assured applicable in the year of death is paid to the nominee.
  • Premiums of decreasing term insurance plans are, usually, lower than premiums of a normal term insurance plan where the Sum Assured remains the same.

How Decreasing Term Insurance Plans Work?

Though a decreasing term insurance plan is a simple type of term plan, you might get confused on how the plan works. So, here is a simple illustration showing how a decreasing term insurance plan actually works. Illustration - Let’s assume that Mohan, aged 30 years, buys a decreasing term insurance plan for a Sum Assured of Rs.20 lakhs. The term selected by Mohan is 20 years. At the end of each plan year, the Sum Assured under the plan reduces by 5% simple rate of interest. Thus, starting from the end of the first policy year, the Sum Assured would start reducing. At the end of the first year the Sum Assured would become Rs.19 lakhs, in the second year Rs.18 lakhs, and so on.

Here’s how the plan’s coverage would look –

At the end of Policy yearAvailable Sum Assured
Year 119 lakhs
Year 218 lakhs
Year 317 lakhs
Year 416 lakhs
Year 515 lakhs
Year 614 lakhs
Year 713 lakhs
Year 812 lakhs
Year 911 lakhs
Year 1010 lakhs
Year 119 lakhs
Year 128 lakhs
Year 137 lakhs
Year 146 lakhs
Year 155 lakhs
Year 164 lakhs
Year 173 lakhs
Year 182 lakhs
Year 191 lakhs
Year 200 lakhs

If Mohan dies anytime during the term of the plan, the available Sum Assured (post reduction) would be paid. For instance, if Mohan dies in the 11th year of the plan, the nominee would get Rs.9 lakhs, the effective Sum Assured at the starting of the 11th year. On maturity, however, no benefit would be paid as the Sum Assured reduces to 0.

Application of a decreasing term insurance plan

Decreasing term insurance plans are, usually, offered as mortgage redemption plans. These plans are taken to pay off debts and loans. As you pay the loan instalments every year, the outstanding balance of your loan reduces. The reducing Sum Assured balance represents this outstanding balance of loan. A decreasing term plan is helpful as it protects your family from being burdened with the liability of your outstanding loan. In case of death during the policy year, the available Sum Assured is paid towards loan repayment thus taking care of your loan. Here are the common features of a decreasing term insurance plan tied to a loan account:

  • The Sum Assured usually represents the amount of loan taken from a financial institution and the interest applicable.
  • The reduction mirrors or closely resembles the repayment of the loan annually. Thus, at the end of every year, the Sum Assured is the outstanding loan amount or close to it.

Let’s see how the plan works: Taking the earlier example, let’s say that Mohan bought a decreasing term insurance plan for protecting his outstanding loan balance from falling on his family’s head. The Sum Assured, plan tenure and the reduction rate is similar as the example taken earlier. It is assumed that Mohan takes a loan of Rs.20 lakhs for a term of 20 years and pays off Rs.1 lakh every year towards loan repayment. The repayment includes the principal amount and also the interest component. Thus, the outstanding balance of loan at the end of every year corresponds to the reduced Sum Assured every policy year.

Loan & policy period Loan AccountSum Assured
Year 119 lakhs19 lakhs
Year 218 lakhs18 lakhs
Year 317 lakhs17 lakhs
Year 416 lakhs16 lakhs
Year 515 lakhs15 lakhs
Year 614 lakhs14 lakhs
Year 713 lakhs13 lakhs
Year 812 lakhs12 lakhs
Year 911 lakhs11 lakhs
Year 1010 lakhs10 lakhs
Year 119 lakhs9 lakhs
Year 128 lakhs8 lakhs
Year 137 lakhs7 lakhs
Year 146 lakhs6 lakhs
Year 155 lakhs5 lakhs
Year 164 lakhs4 lakhs
Year 173 lakhs3 lakhs
Year 182 lakhs2 lakhs
Year 191 lakh1 lakh
Year 2000

If Mohan dies in the 11th year of the plan, as before, Rs.9 lakhs paid under the plan can be used by the nominee to pay off the outstanding balance of loan availed by Mohan. Simple, isn’t it? Other than loan protection needs, a decreasing term insurance plan is also useful for you if your protection needs decrease over the years. If you are in your middle ages and soon your children would become independent, your financial responsibilities would decrease over the years. In these situations you can opt for a decreasing term insurance plan where the Sum Assured decreases over time. The plan would be suitable for your needs and cost lower too. Decreasing term plans are simple and beneficial too. Do you know how?

Advantages of decreasing term insurance plan

Financial security of family Imagine if you face a pre-mature death and your family is saddled with your loan burden! Would they be able to shoulder the financial burden while at the same time struggling to make ends meet? Loans have become very common nowadays. Almost all of us have one or the other type of loan and protecting it from falling on our family in case of our unfortunate demise is prudent. A decreasing term insurance plan does that. By paying off the outstanding loan balance on death the plan helps provide a sense of financial security for your family.

Affordable premiums A term insurance plan is very cheap and that is one of its major USP. A decreasing term plan is even cheaper than a term plan. Since the Sum Assured decreases, the premiums of the plan are very cheap. Compared to the financial security the plans provide, such low premiums seal the deal.

Tax saving A decreasing term insurance plan is a life insurance plan and like other life insurance plans, the plan too provides tax benefits. The premiums paid for the plan, besides being low, also save taxes 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. While premiums have a maximum tax-free limit of Rs.1.5 lakhs, there is no limit on the death benefit received under the plan.

Aren't Decreasing Term Insurance Plans Beneficial?

Yes, decreasing term insurance plans are beneficial and if you have a loan or mortgage account or if your protection needs are expected to decrease over time, opt for a decreasing term life insurance plan. Currently, there is only one plan in the Indian insurance market which offers decreasing term life cover and the plan is SBI Life’s Saral Shield Plan. Besides decreasing cover, the plan also allows level coverage option. Moreover, the decreasing cover under the plan is available in two variants. You can avail the cover for –

  • Loan protection, or
  • Family protection. In case of loan protection, the policy would be designed based on your loan interest rate. In case of family protection, the plan pays monthly income benefits in case of death. Premium discounts and additional riders make the plan a good choice.