Is Decreasing Term Insurance The Right Choice For You?
As soon as you start working, you begin saving money and building up your assets. In your 20s and 30s, you may want a car or bike, a house, etc. Then you may eventually get married and have kids, you may want them to fulfil all their dreams. You may take loans to pay for all of this - buying a vehicle, a house, funding your child's education, etc. You decide to get a term insurance plan so these loans won't be a burden on your loved ones if something unfortunate happens to you. As you get older, in your late 50s or early 60s, the burden subsides, and hence, your insurance needs will be lower.
So, is there a term insurance plan available that fits your decreasing financial responsibilities? Well, there is! A Decreasing Term Insurance Plan is a variant of term insurance that is specifically designed to cover your decreasing needs. In this article, let’s learn about this lesser-known term insurance plan, and understand how it works.
Let’s dive right in!
What Is Decreasing Term Insurance?
Decreasing Term Insurance, as the term implies, is a type of Term Insurance Plan, where the sum assured keeps on decreasing on a predefined basis. It decreases gradually over the span of the policy until it reaches a maximum limit of 50% of the base sum assured.
How Does A Decreasing Term Insurance Plan Work?
- Basically, after you select the features, benefits, etc. that are right for you, the insurer will issue the Decreasing Term Insurance Plan to you.
- You’ll have to pay the premiums based on the premium payment term and frequency you choose at the time of purchase.
- Over time, the sum assured of the policy will start reducing at a predetermined rate, usually every five years.
- The sum assured will keep on decreasing until it reaches a maximum of 50% of the base policy cover.
- In case you pass away in the middle of the policy tenure, the applicable sum assured in that year will be paid to your nominee. And then, the policy will end.
Let’s understand how a Decreasing Term Plan works with the help of Yash’s example.
Yash has an outstanding home loan of Rs. 2 Crore and hence, decides to buy a Decreasing Term Insurance Plan. He chooses a sum assured of Rs. 2 Crore and a policy term of 40 years. Let's assume that the sum assured will reduce by 10% starting from the 6th policy year. And, it will keep on reducing till it reaches a maximum of Rs. 1 Crore (50% of the base sum assured).
Let’s see how the sum assured will reduce under Yash’s Decreasing Term Insurance Plan.
|Year||How Will The Sum Assured Decrease?||Sum Assured Applicable|
|Year 1 to Year 5||No decrease||2 Crores|
|Year 6 to Year 10||2 Crores minus 10% of 2 Crores||1.8 Crores|
|Year 11 to Year 15||1.8 Crores minus 20% of 2 Crores||1.6 Crores|
|Year 16 to Year 20||1.6 Crores minus 20% of 2 Crores||1.4 Crores|
|Year 21 to Year 25||1.4 Crores minus 20% of 2 Crores||1.2 Crores|
|Year 26 to Year 40||1.2 Crores minus 20% of 2 Crores||1 Crore|
This is how the sum assured will keep on reducing and in case Yash passes away in the middle of the policy term, the sum assured applicable in that year will be paid to his nominee. So, if he passes away in the 9th policy year, the insurer will pay Rs. 1.8 Crores to his nominee. And in case he passes away in the 24th policy year, his nominee will receive Rs. 1.2 Crores.
How Is A Decreasing Term Insurance Plan Different From A Regular Term Insurance Plan?
Here are a few key differences between a decreasing and regular term insurance plan.
|Decreasing Term Insurance||Regular Term Insurance|
|Sum Assured||It keeps on decreasing at specific intervals.||It remains fixed throughout the policy tenure.|
|Premium Payable||The premiums will be a bit lower compared to Regular Term Insurance.||The premiums will be a bit higher compared to Decreasing Term Insurance.|
|Death Benefit||The death benefit your nominee will receive will depend on the year you pass away.||Your nominee will receive a death benefit chosen by you at the time of policy purchase.|
|Suitability||You can buy this plan if you want to protect your family from the burden of loan repayment.||You can buy this plan if you want to safeguard your family’s financial future.|
How To Decide If A Decreasing Term Insurance Plan Is Right For You Or Not?
The idea behind a Decreasing Term Insurance Plan is that as you age, your financial responsibilities, loans/liabilities, etc. will decline. As a result, the need for a high life insurance cover will also decrease.
For instance, if you just got married and are planning to start a family, you would probably have a fair number of financial obligations and loans. You may have taken some loans, plus, you may have the cost of raising a child. During this period, you’ll obviously need a large insurance cover. But, after your loans are settled and your child has graduated and has become independent, you would likely not need the same amount of insurance cover. In such a case, a Decreasing Term Insurance might be a great option.
A Decreasing Term Insurance Policy can either be age specific or linked to your debt or loans. You can consider buying it if -
- You think you’ll be done with all your major financial obligations and won’t have any visibility of financial dependents in the later years of your life.
- You have loans/liabilities and don’t want the burden of repaying these loans to fall on your family’s shoulders - if you pass away before settling them.
Unlike a Regular Term Plan, where the sum assured remains fixed throughout the duration of the plan, the sum assured under a Decreasing Term Plan reduces at specific intervals. So, if you are looking to buy an insurance plan solely to cover your loans/liabilities, a Decreasing Term Plan can be a good fit for you. It will ensure that the burden of your loans/liabilities doesn’t trouble your loved ones if you pass away before settling them.
Got a query related to Decreasing Term Insurance Plans?
Post it on the Beshak Insurance Forum and get answers from insurance experts, for free!
- Under a Decreasing Term Insurance Plan, the sum assured keeps on decreasing gradually over the span of the policy until it reaches a maximum limit of 50% of the base sum assured.
- In comparison to Regular Term Insurance, the premiums of a Decreasing Term Plan will be a little lower.
- A Decreasing Term Insurance Policy can either be age specific or linked to your loans or liabilities.
- A Decreasing Term Insurance Policy is based on the idea that as you age, your debts, liabilities, and other commitments will decrease. And hence, the need for a high life insurance cover will also decrease.
- You can buy this plan if you want to protect your family from the burden of loan repayment or if you don’t have any visibility of financial dependents in the later years of your life.
Aakansha is a Content Ideator and Writer at Beshak. With her easy-to-understand content, she makes insurance simple for everyone. She comes with a strong background in finance and commerce and wants to help families make positive insurance decisions that are good for a lifetime.