Ch. 14: Decreasing Term Insurance

Everyone has different reasons for buying term insurance. Some buy it so that their loved ones don’t give up on their dreams in their absence. Or so that their family doesn’t compromise on their standard of living when they’re not around. Some may even buy term insurance just to cover the large loans/liabilities they may have.
If you, too, are buying term insurance with the sole aim of safeguarding your family from bearing the burden of your debts, you should consider purchasing a decreasing term insurance policy.
What is decreasing term insurance? How does it work? What are its advantages? Who is it suitable for?
Let’s find out!

What Is Decreasing Term Insurance?

Decreasing term insurance is a variant of term insurance where the sum assured keeps on decreasing periodically at a pre-determined percentage.

How Does Decreasing Term Insurance Work?

Under a decreasing term insurance plan, your sum assured will keep on decreasing once every 5 years by a specific percentage. The sum assured will keep on reducing until it reaches a maximum of 50% of the original sum assured. In case you pass away
in the middle of the policy tenure, the insurer will pay the reduced sum assured to your nominee/family.
A decreasing term insurance policy can be age specific or it may be linked to the loans/liabilities you may have taken. Basically, as you grow old, your liabilities might decrease, and hence, the need for a higher sum assured might decrease as well. Hence, you may not require the original cover amount you purchased. A Decreasing Term Plan can also be a good fit for you if you have loans/liabilities which you expect to pay off in the near future. If you buy this plan specifically to cover a loan/liability, the sum assured under this plan will reduce as the loan/liability reduces. And in case you pass away while the policy is in force, the insurer will pay the claim amount to your family - which they can use to repay the loan/liability.

Example:

Let’s understand how decreasing term plans work with the help of Jannat’s example.
Jannat, 35, buys a decreasing term insurance plan for a sum assured of Rs. 1 Crore and a tenure of 35 years. As per the policy terms and conditions, the sum assured will keep decreasing at the rate of 10% every 5 years - until it reaches a maximum of 50% of the original base cover.
Let’s see how the sum assured will reduce under the decreasing term insurance plan taken by Jannat.

Year	How Will The Sum Assured Decrease?	Sum Assured Applicable
Year 1 to Year 5	-	1 Crore
Year 6 to Year 10	1 Crore - 10% of 1 Crore	90 Lakhs
Year 11 to Year 15	90 Lakhs - 10% of 1 Crore	80 Lakhs
Year 16 to Year 20	80 Lakhs - 10% of 1 Crore	70 Lakhs
Year 21 to Year 25	70 Lakhs - 10% of 1 Crore	60 Lakhs
Year 26 to Year 60	60 Lakhs - 10% of 1 Crore	50 Lakhs

So, this is how the sum assured under the term insurance plan will keep on decreasing.
Suppose Jannat passes away in the middle of the policy term, the available sum assured in that year will be paid to her family. Meaning, if she passes away in, say, the 7th policy year, the insurer will pay Rs. 90 Lakhs to Jannat’s family.

When Should You Buy A Decreasing Term Plan?

The main purpose of a decreasing term insurance policy is to cover a specific debt. So, a decreasing term insurance plan is best suited if you want to protect your loved ones against the debt you’ve taken, in case you’re no longer around.

What Are The Advantages Of Decreasing Term Insurance?

Here are a few benefits of buying a decreasing term insurance policy -

• Financial protection
  If you pass away before settling your loans and liabilities, the burden of repayment would fall on your loved ones. A decreasing term insurance plan will financially protect your family from this burden, should something happen to you.
• Affordable premiums
  Because the sum assured keeps on reducing every year, the premiums of a decreasing term insurance policy are quite less. Sometimes, the premiums of these plans are cheaper than regular term insurance plans.
• Tax advantages
  The premiums you pay under a decreasing term insurance plan are tax-deductible under Section 80C of the Income Tax Act, 1961. And, the term insurance payout your family will receive, if you pass away in the middle of the policy term, is also exempt from tax under Section 10(10D).

Wrapping up!

So, that is all about decreasing term insurance plans sold by insurance companies. A decreasing term insurance plan is a type of term plan where the sum assured keeps on reducing at a predefined rate every year. The primary purpose of a decreasing term plan is to safeguard your loved ones from the burden of repaying your loans/liabilities, in case you pass away before settling them.