Level Term Vs Decreasing Term Life Insurance

Securing your family’s future is extremely important, and we often overlook it until a close call shakes us up! Akshay - a 29-year-old, is no different! He is a committed professional photographer who works hard at what he does. One day, he was driving to a clientele's place and narrowly escaped a fatal accident. He was grateful to his dear gods for sparing him! However, he immediately had a worried thought: What would happen to his family in the event that something bad happened to him? To protect his family, he quickly decided to get a term insurance policy.
In this techie era, there is no better option than Google (and similar browsers) to clear our queries. And just like any of us, Akshay instantly searched for term insurance. With so many results flooding up his feed, two terms caught his attention - level term Vs decreasing term life insurance. The two differ in how coverage varies over time. But there is more to that, and this article is precisely going to talk about both of these types. Toward the end, we will also compare the two to determine which one suits your needs better.
So, let’s skip formalities and jump straight into this enriching piece-

What Is Level Term Life Insurance?

Having level term life insurance is similar to providing your loved ones with a sturdy safety net. You might be wondering how. We will explain-
It ensures that your dear ones are protected with a consistent death benefit throughout the policy's duration. Should you pass away at any point within the selected term, your nominee will receive the predetermined sum. This offers financial stability and peace of mind, no matter when you pass away during the policy term.

Understand this more closely using an example now

Rakesh, just another fella like Akshay, is married to a devoted woman and has two children who attend school. He wished to provide them with an extremely contented and safe life. Rakesh made the decision to get a level term life insurance policy for a 20-year policy term after speaking with a financial counsellor. He decided on an assured amount of Rs. 50 lakhs. This meant that if Rakesh passed away at any time during these 20 years, his family would receive a payout of Rs. 50 lakhs.
Rakesh diligently paid the premiums each year. 12 years later, Rakesh was involved in a fatal car accident. His family was devastated by the loss. But his term insurance policy came to their rescue. Do you know how much the payout helped Rakesh’s family? With the money, Rakesh’s wife paid off their home loan. She used the rest to manage their daily living expenses and to fund her children's college tuition. Understood level term insurance? Let's now move on to the next type.

What Is Decreasing Term Life Insurance?

It is a type of term insurance that reduces your cover amount over time. This decrease is consistent with an already agreed-upon schedule and continues until the coverage reaches a specified limit. The limit is usually around 50% of the original sum assured. This means that if you pass away during the policy duration, your nominee will receive the sum assured for that specific year. After that, the policy ceases. You might be wondering why you need this.

Let’s understand this better with an example

Say, Siraj, a colleague of Akshay who was very well-versed in Term Insurance, bought his dream home along with his wife. He took a home loan of Rs. 1 Crore. Owing to his knowledge, he strategically opted to buy decreasing term insurance plans. He chose a sum assured of Rs. 1.5 Crores for a 30-year policy term. According to the plan’s terms, the sum assured will gradually decrease starting from the 6th year. It will decrease by 10% every 5 years until it reaches a minimum of Rs. 75 lakhs (50% of the initial sum assured).
Here’s how the sum assured diminishes under Siraj's plan

Here’s where it gets interesting -
Should Siraj bite the dust within the policy term, his nominee will get the appropriate reduced sum offered for that particular year. For example, his nominee would get Rs. 1.35 crores if Siraj passes away in the 8th year of the policy. Or, if Siraj passes away in the 26th year, the nominee would be eligible for a payout of Rs. 75 lakhs.

Difference Between Level And Decreasing Term Life Insurance

The table below shows the differences between both level term and decreasing term life insurance

Now, coming to the most awaited section of this article- which of the two best fits your needs?

Which Insurance Is Better?

To determine this, you should be aware of your future needs and anticipated financial condition when deciding between level term and decreasing term life insurance. Let’s break them down one by one-

First, level term insurance plans-

If you want a death benefit that remains fixed for the duration of the policy, this type is your best option. In simple words, your beneficiaries are promised the same death benefit, irrespective of when you pass away during the term. Why is this good? Well, this is why-

It Replaces Your Income:

Suppose you are your household's primary provider of income. When you purchase a level term policy, you are promising your family a certain amount of money that will not change throughout the course of the policy. This enables your family to carry on with their way of life without much of financial hurdles.

It Funds Your Kids’ Education:

As a parent, nurturing your children isn't just a duty - it's your heartbeat, the very rhythm that keeps their world spinning. You want to pre-plan everything and set a fail-proof future for them. This will help your kids go to their dream college or even help you fund their weddings. With a level term policy, the death benefit can help cover all such big expenses.

So, level term insurance plans are pretty versatile, right? Now, how about we take a look at decreasing term insurance plans next?

Decreasing term insurance is ideal for people whose expenses decrease over time. Well, the concept is really straightforward. As the sands of time settle, so too do your financial burdens. With each passing year, the weight of loans and debts eases. This means that the need for the robust life insurance coverage you once sought may now become lesser.

Let’s take our photographer Akshay’s example again for a better understanding of this -

Akshay tied the knot three years later and is excited to welcome his kid into his family. He currently has a lot of financial obligations, including car loans and mortgages. Not to mention the costs associated with raising and schooling a child. At this point, he will really need a large insurance policy to make sure his family is covered in case something were to happen to him. But what about in a few years? Akshay’s loans are paid off, his child has graduated, and they are financially independent now. At this point, he doesn't need as much life insurance because his financial load has lightened up. This is where decreasing term insurance comes in handy. It adjusts to Akshay’s needs and offers less coverage as his financial responsibilities decrease. This type of policy can also be tailored to your age or tied directly to your debts or loans. Sounds pretty flexible, right? Here’s why you might want to consider it -

You have major financial obligations -

Do you have a vehicle loan or mortgage, or are you funding your children's college education? Not to worry! If you expect to clear these big responsibilities items and have no financial dependents in the future, decreasing term insurance plans makes a lot of sense. This policy adjusts as your financial burden comes down. It ensures that you are not overpaying for coverage you don’t need anymore.

You have significant loans or liabilities -

Imagine this scenario: the weight of those lingering loans shouldn't fall upon your loved ones' shoulders should the unexpected occur. With a decreasing term policy, your family can rest assured that the payout will seamlessly settle those debts, offering them solace and financial security in their time of need. This guarantees^# that your loved ones won't be burdened with loan repayment after your passing.

To Sum Up,

When it comes to level term vs decreasing term life insurance, both have their own benefits. Level term insurance plans are ideal for those who need consistent financial planning. This is because it maintains your cover amount as the same over the course of the policy. However, the coverage of decreasing term insurance decreases when you pay off debts, such as a mortgage. And this will be best for those who predict that their financial responsibilities will reduce over time. Therefore, your needs will determine which is best for you. Select the one that best suits your needs after considering what best suits your life.