Decreasing Term Insurance

Decreasing Term Insurance Plan In India 2021

Not all people buy term insurance for the same purpose. Though the intent behind buying a term insurance plan is to ensure the financial security, different people buy it for different reasons. Also, the policy term of the term policy along with the chosen amount of sum assured depending on the extent of loans and liabilities that the customers had bought in addition to the liquidity of the assets bought.

How Does Decreasing Term Insurance Plan Work?

However, some people prefer to buy term insurance so that the burden of a particular liability does not fall on their nominee(s). They buy term policies in which the amount of sum assured decreases every year by a certain percentage. For example, a person has adequate assets at his disposal and realizes that his loved ones will be able to take care of themselves. However, the customer has taken a home loan worth Rs 50 lakhs and fears that after his sudden death, his nominees will have to repay the loan amount. Buying a decreasing term insurance plan cover can be of help as the customer can choose the reduction in sum assured each year to the extent of the loan amount repaid each year. This means that in the event of the sudden death of the policyholder, the nominees will pay the remaining amount of sum assured equal to the amount of remaining amount of loan left to be repaid.

Many people are unaware of the concept of decreasing term insurance plan and the features of such term policies. Though the amount of sum assured gets reduced each year by a fixed percentage, other features of decreasing term insurance plan remain the same as level term life insurance policies. The other features include:-

1. The policyholder chooses the policy tenure or term as per choice;
2. Though the risk cover is reduced each year, the premium charges remain the same each year;
3. The Sum Assured is reduced to zero as the plan reaches maturity;
4. On the sudden death of the policyholder, the amount of sum assured applicable in the year of death is paid to the nominee;
5. Insurance companies charge lower premium amounts for decreasing term insurance plan.

When Should One Opt For Decreasing Term Insurance Plan?

Decreasing term insurance plans are essentially bought as mortgage redemption plans. This is because most customers opt for it only to pay off their lingering loans and liabilities. The outstanding loan amount reduces as the customers start paying off the loans. The sum assured in decreasing term insurance plan also goes down by the same extent. This means at the time of the customer’s death, the outstanding loan amount is equal to the reduced amount of sum assured. This means that the death benefits received by the nominee will take care of the outstanding loans, thus, freeing the nominee(s) from the burden of loans taken by the policyholder.

How Does One Benefit From Buying Decreasing Term Insurance?

Buying a term insurance plan with a reducing amount of sum assured may seem weird, but benefit people having loan or mortgage accounts and expect their financial needs to decrease with every passing year. The concept of decreasing term insurance is yet to gain customer attention. Currently, only the SBI Life Insurance Company is selling such plans. However, some customers prefer to enhance the impact of this plan by opting for additional term insurance riders too. This means that in addition to having the effect of term insurance cover to repay loans on time, the nominee(s) may also avail additional benefits like a fixed monthly income after the death of the policyholder(s).

Before applying for decreasing term insurance cover, customers must consider the following facts:-

1. What is the amount they wish to be covered for?
2. What is the percentage at which they would like the sum assured to be reduced each year?
3. What should be the policy term?
4. Should they opt for enhanced cover options by adding riders to the existing cover?
5. Which covers they must opt for depending on possible circumstances in the future?

Tax Benefits

Tax benefits on decreasing term insurance are the same as in level term insurance policies. This means that premiums paid towards decreasing term insurance policies qualify under Section 80C while the sum assured amount continues to be free of tax under Section 10(10D) under the Income Tax Act.