Decreasing Term Insurance

Indians are known to be good savers, setting aside a significant chunk of income for emergencies. With a life insurance penetration of just 3%1in January 2024, savings have become a cushion for unforeseen circumstances. With a high dependence on savings, a fall in savings rate is worrying. The net financial savings of Indian households have witnessed a steady fall over the years2. While dwindling savings is a matter of concern, affordable life insurance products like Term insurance can help provide financial protection. In case you wish to protect your outstanding loans or debt, you can consider opting for a decreasing term insurance plan. But to understand that, you need to first know what a term plan is.

What Is Term Insurance?

A term insurance plan is one of the most basic forms of life insurance. It has a fixed tenure and if the insured dies within the policy term, the insurance company pays a pre-decided amount to the nominees. Term plans do not have any investment component and the policy terminates when the tenure ends. One of the term insurance benefits is that it is more economical when compared to other types of life insurance as it does not have any investment component. It offers comprehensive coverage at affordable rates. With term insurance, you do not have to worry about the financial well-being of your family in your absence. Insurance companies offer a host of term insurance plans to cater to a wide array of customers. Decreasing term insurance is one of the popular term insurance plans.

What Is Decreasing Term Insurance?

A term insurance plan is one of the simplest and the most affordable insurance plans. One can get substantial coverage at a relatively affordable rate. When a term insurance plan is bought, the insurer ascertains the risk associated with covering the insured and decides the term insurance premium based on several factors like age, occupation, lifestyle etc. The premium, as well as the sum assured of a term insurance plan, remains constant for the entire policy term. However, the liabilities of an individual generally decrease with age and so does the need for insurance coverage.

A decreasing term insurance plan can help calibrate the sum assured with insurance needs in different stages of life. The sum assured of a decreasing term insurance plan decreases on a pre-defined basis. The premium of decreasing term insurance remains constant but the sum assured decreases basis pre-defined criteria

How does Decreasing Term Insurance work?

Under a decreasing term insurance policy, you choose the sum assured, policy tenure, premium paying tenure and frequency. You can also opt for optional riders, if available. The rate at which the sum assured would be decreased would be determined.

Based on these factors, your age and other risk factors, the premium would be determined. You pay the premium over the chosen premium paying tenure and in the selected frequency.

The sum assured would start reducing from the second policy year. If the life assured passes away during the policy tenure, the reduced sum assured applicable in the year of death will be paid. Usually, decreasing term plans do not have a maturity benefit. So, if the life assured survives the policy tenure, no benefit will be paid.

When Should One Buy Decreasing Term Insurance?

A decreasing term insurance plan works on the rationale of lower liabilities in the later stages of life. When you start your career, you save money and accumulate assets. Needs like cars, houses or furniture grow in the 20s and the 30s. Many life goals like buying a house or funding children’s education are achieved through loans. The addition of several liabilities in a short span of time leads to the need for substantial insurance coverage. A term insurance plan fulfils the need. But with the growth in career, the income increases and simultaneously the loan burden decreases. Typically, the burden of liabilities like a car loan or home loan almost subsides in the 50s and 60s. However, if one analyses his/her actual insurance needs, it may be lower.

Decreasing term insurance essentially balances the insurance need with the liabilities. If you do not have significant long-term commitments, you should opt for decreasing term insurance. A decreasing term insurance plan also ensures that any remaining personal liabilities are effectively taken care of in your absence. Before investing in decreasing term insurance, it is important to analyse your insurance needs, especially in the later stages of life. A term insurance calculator can give you a clear idea of the premiums that you will have to pay to ensure a certain level of insurance cover. A term insurance calculator is a simple online tool that asks for basic details like gender, date of birth, tobacco consumption and the amount of cover. With the knowledge of premiums, you can prepare a better financial plan as the premiums have to be paid on time to enjoy the insurance cover.

Benefits of Decreasing Term Insurance Plans

1. Affordable

A decreasing term insurance plan is similar to regular term insurance with slight changes. A regular term insurance plan is the most affordable life insurance product. It is substantially cheaper than traditional life insurance policies. The premiums of a decreasing term insurance plan remain constant throughout the tenure.

2. Optimum Coverage

The insurance cover availed by an individual depends on his/her annual income, liabilities and financial goals. The variables change with age. Generally, the liabilities decrease and income increases. You may have opted for a certain amount of coverage at a young age, but may not need the same coverage later in life. Decreasing term insurance ensures that you have the optimum level of coverage in life. The insurance coverage decreases with age as the liabilities decrease. Moreover, if you have financially independent family members, you may not need a large insurance cover. With a decreasing term plan, you will have the optimum level of coverage.

3. Helps Take Care of Liabilities

With rising costs and improving lifestyles, it has become normal to accumulate liabilities for achieving life goals. A bulk of the liabilities like a car loan, house loan and education loan are paid off by the time of retirement. However, some individuals still may have certain personal liabilities. No one wants their family to suffer due to liabilities accumulated by them. A decreasing term insurance plan ensures that your family doesn’t suffer in your absence. It financially ring-fences family members from liabilities in your absence.

4. Tax Benefits

Investing in a decreasing term insurance plan can help you save on income tax. The premiums paid for a decreasing term insurance plan are eligible for a tax deduction of up to Rs 1.5 lakh under old regime of Tax under Section 80C of the Income Tax Act, 1961 if underlying conditions are satisfied. The benefits received from a decreasing term insurance plan are tax-exempt under Section 10 (10D) on fulfilment of all conditions therein. Tax benefits are subject to provisions of Income Tax Act, 1961, as amended from time to time.

5. Flexibility

One of the major term insurance benefits is the flexibility it provides. You can choose to enhance the coverage by opting for certain term riders. Decreasing term insurance plans generally have optional riders that cover accidental death, terminal illness and accidental disability.

Reasons Decreasing Term Insurance Might Be Suitable for You

A decreasing term insurance plan might be suitable for you in the following instances –

1. If you expect your financial needs and liabilities to reduce with advancing age

2. If you have taken a loan and you buy a policy to cover the outstanding loan amount. In such cases, as the loan amount reduces with EMI payments, the coverage would also reduce. On your premature demise, the reduced sum assured would be suitable to cover your outstanding loan amount.

When Can You Consider Opting for a Decreasing Term Insurance Plan?

You can consider opting for a decreasing term life insurance plan when you wish to protect your outstanding liabilities. It can be taken at all ages.

Even during older age, you can choose a decreasing term plan. Thus, if you have taken a loan, a decreasing term life policy would be a good choice as it would match your reduced loan balance and can be used to pay off the liability on your premature demise.

Conclusion

The primary aim of investing in any life insurance product is the financial stability of the family in your absence. It is important to opt for a credible insurer with a proven track record so that your family members do not have to face difficulties in receiving the insurance benefits.

FAQs

1. What types of debts can be covered with a Decreasing Term Policy?

Usually, every type of debt can be covered with a decreasing term insurance plan. That being said, it is usually better to opt for the plan to cover high-value debts like a home loan so that their repayment doesn’t become a burden in your absence.

2. Does Decreasing Term Insurance offer any cash value or savings component?

A decreasing term insurance policy is a protection-oriented life insurance plan. Usually, it does not have any cash value or a savings component. As such, there is usually no maturity benefit. Moreover, if you surrender the policy during the policy tenure there might not be any surrender value too. So, it is better to continue the coverage throughout the chosen tenure and not exit the policy before the term expires.

References:

1. https://www.statista.com/topics/11810/life-insurance-industry-in-india/#topicOverview

2. https://economictimes.indiatimes.com/news/economy/indicators/indian-households-net-financial-savings-falls-to-5-1-in-fy23-from-11-5-in-fy21-as-liabilities-rise/articleshow/106420124.cms?from=mdr

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