Decreasing Term Insurance Explained

It is no surprise that savings work as a cushion to shield one’s life from unpredictable challenges, and Indians have already gained mastery in it. They know how to keep a significant chunk of income aside as savings for emergencies.

However, over the last few years, it is getting hard for many of us to cope with the rising expenses. The huge recession phase is currently witnessing a drastic fall in household savings. Imagine how your family members will manage their day-to-day household expenses, repay the debts, and fulfill their aspirations once you are no longer around. Therefore, investing in a term insurance plan can be an ideal option.

Term insurance plans are emerging affordable and effective life insurance policies. They provide much-needed financial security to the policyholder’s family if he or she is no more. While planning to invest in a term insurance plan, you will come across various types like increasing term insurance plan, decreasing term insurance plan, and pure term plan, among others. Currently, a decreasing term plan is getting a lot of attention among policyholders. Let us understand the decreasing term insurance plan meaning before we speak about its benefits.

About decreasing term plans

A decreasing term policy can help you in aligning your life cover with your existing liabilities. If you have taken financial obligations to achieve your life goals, such as buying a car or home, you can consider investing in this term plan. With time, your debts decrease as and when you keeping paying equated monthly installments.

In this plan, your sum assured represents the aggregate of your debts. Here, the sum assured  reduces every year at a pre-specified rate along with the liability value. If the policyholder dies during the plan’s tenure, the insurer pays the applicable amount to his or her nominees. They can use this amount to repay the loans. Once the plan matures, the sum assured drops to zero, as by that time the policyholder has repaid all the pending dues. This plan comes at an economical premium. You can utilize the term plan premium calculator to determine the cost you need to shell out for this policy.

Working of a decreasing term plan

Here is an illustration to explain to you the functioning of this policy.

Assume that Naresh had invested in a decreasing term plan for 20 years. He opted for a sum assured of INR 20 lakh at the start of the policy. Here, the sum assured will decrease at the rate of 5% per year. So, his sum assured will be INR 19 lakh in the first year and INR 18 lakh in the second year. If Naresh dies in the second year, his nominee will receive a sum assured of INR 18 lakh. However, if he survives the tenure, his sum assured will be zero when the policy matures, as he has paid all his debts by that time.

Benefits

• Pocket-friendly

A decreasing term plan comes at a budget-friendly rate compared to other conventional life insurance policies The premium stays constant throughout the policy tenure.  Moreover, when you invest in it at a young age, you get it at a cheaper cost.

• Prime coverage

Age is the leading contributor that highlights the importance of decreasing term plans. For instance, as you age, the liabilities decrease, but income increases. If you have a son who gets a job, the family’s earnings rise further. You may not need any coverage during this stage of life. However, if anything unfortunate happens with you untimely, the coverage may prove useful for your family for repaying the debts.

• Tax exemptions

You can save tax by investing in a decreasing term plan. Since the premium on term insurance is eligible for a tax deduction up to INR 1.5 lakh as per Section 80C of the Income Tax Act 1961, you can save a significant amount over the years. Moreover, the death benefit is tax-free under Section 10 (10D) of the Act.

Ensure that your loved ones do not take the financial strain of repaying your liabilities. Use a term plan premium calculator to compare various policies and select a suitable term insurance plan.