Decreasing Term Plan

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Decreasing Term Insurance

There are many forms of term insurance that have been designed to help people with specific needs. Among them, is the decreasing term insurance plan. A decreasing term insurance plan is one of the best forms of term insurance. Here, the sum assured keeps decreasing as the policy progresses. The policy is very helpful for people who buy term plans to cover mortgagees or large loans. Let us understand this with an example. Rajesh took a home loan of INR 20 lacs in 2010. He moved into the newly purchased house with his family the same year. Then, he applied for a decreasing term insurance plan of INR 20 lacs. The loan tenure was for 20 years so he took the term plan also for 10 years. The sum assured reduced by 5% each year. Unfortunately, Rajesh died in 2017. His wife, who was the nominee in the decreasing term insurance plan, received a death benefit of INR 13 lacs. She cleared the pending home loan with that amount and the family continued to live in the house without any worries whatsoever.

Key Features of Decreasing Term Insurance Plan 

Let us begin by looking at the key features a standard decreasing term insurance plan:

  1. Decreasing cover - As stated, the life coverage amount in such a plan keeps reducing. The cover reduces at a rate of 5% every year. The policy can be bought for a maximum duration 0f 30 years. So, if you start off with a sum assured of INR 19 lacs, it can come down to INR 15 lacs after five years. 
  2. Low premium - The premium rates of the decreasing term insurance plans are lower as compared to a regular term insurance plan. This is why decreasing term insurance is the cheapest form of life insurance, being cheaper than a standard term plan as well. 
  3. Comprehensive life cover - You can get to choose a high life cover when you buy the decreasing term insurance plans. These plans help you to cover your mortgage sufficiently and also to protect your family from any financial troubles that may come after your demise.
  4. Policy variation - You can buy the decreasing term insurance policy to protect your family’s overall financial wellbeing or you can buy it purely as a loan protection cover. If you choose the latter, the decrease in the sum assured will be calculated after taking the loan interest rate into account. The policy variation option gives you greater flexibility and more accuracy when you seek to protect your loved ones in case you die unexpectedly. 

These are the key features of a decreasing term insurance plan that help you to stay protected in a comprehensive yet very affordable manner.

Benefits of Decreasing Term Insurance

Next, we will speak about the benefits you get when you buy a decreasing term insurance policy:

  1. Economical cover - 
    As mentioned above, the decreasing term insurance plans are among the cheapest forms of life insurance available in India. It is ideal for someone who cannot afford a fancy and frilly life insurance plan but still needs a basic term cover. Since the decreasing term insurance plans are specially designed to cover loans and mortgages, it works well by offering a specific cover that ensures the assets stay with the family even if the policyholder dies without repaying the loan.

  2. Excellent protection for loans - 
    Buying a decreasing term insurance plan is a great opportunity to protect your mortgage. Let us assume you take a loan to buy a house. Your parents, spouse and kids live in the house. After you die, they cannot repay the loan and they are asked to evacuate. However, if you have a decreasing term insurance plan, your family can easily clear the loan and continue to have a roof over their heads. Similarly, the decreasing term insurance plans prove to be useful for small business owners who take loans to start their firms. If for any reason the entrepreneur dies, the business does not have to wind up. The policyholder’s partners can clear the loans with the decreasing term insurance plans, rather than shutting the firm down.

  3. Reduce cover as responsibilities end - 
    If you take the plan with a decreasing term cover, the sum assured will keep reducing. As you age, your responsibilities will also reduce. Your children will gradually grow up and start earning money, your loans will get paid off, etc. So 15 or 20 years from now you will not require that high a life covered. You can thus opt for a decreasing term insurance plan which is cheaper than a regular term life cover and be able to protect your family easily.

  4. Tax benefits - 
    Section 80C of the Indian Income Tax Act states that life insurance premium, upto a maximum sum of INR 1.5 lacs a year, is tax exempted. Therefore, you get the tax rebate for the premium you pay for the decreasing term insurance plan and this proves to be an added benefit.

  5. Multiple payout options - 
    You can choose from between the lump sum payout, the staggered payout or a combination of the two. If you choose the lump sum payout, your nominees will receive the entire death benefit in one go and the policy will terminate. If you choose the staggered payout option, the death benefit will be broken up in installments and paid over a period of time. You can also choose a combination of the two, where first a lump sum will be paid and the remaining amount will be paid in installments.

  6. Available online - 
    It is very easy to get a decreasing term insurance plan online. You can visit the insurance provider’s website, entire your requirements and personal details. Then, pay the premium and the policy will be issued in your name.

Keeping these benefits in mind, it can safely be said that a decreasing term insurance plan can be of great use when you have a large debt to repay or when you need to take care of the financial responsibilities of your family.

What is Covered? 

Now let us take a look at some of the coverages available under the decreasing term insurance plans:

  • Life cover - The most important and the principal cover available under the decreasing term insurance plan is the life cover. A term plan with a decreasing sum assured offers a life cover in exchange for the premium you pay. Your nominee receives the coverage amount if you die within the policy tenure. 
  • Riders - There are add-on covers available with the decreasing term insurance plans. The riders available include the critical illness rider, the accidental death benefit rider, etc.

As you can see, a decreasing term insurance plan offers some very basic covers. However, these covers are extremely handy and help you meet the financial requirements that may come up if something unexpected were to happen to you.

What is not covered? 

There are some covers that are not available under the decreasing term insurance plans. They are:

  • Maturity benefit - A decreasing term insurance plan is a form of term insurance and it offers a pure life cover. So, you do not get a maturity benefit after the policy tenure comes to an end.
  • Return of premium - Similarly, you do not get back the premium amount you paid if you survive the policy period. There is nothing to expect if you outlive the tenure of your decreasing term insurance plan.

Keep these factors in mind before you buy a decreasing term insurance plan.  

How Does Decreasing Term Insurance Plan Work? 

Let us now explore how a decreasing term insurance plan works:

  1. Buying the plan - 
    You can buy a decreasing term insurance plan online. The process is very simple. All you have to do is go online, select the coverage amount, the type of cover you want, fill in the details and make the payment. Once that is done, the policy will be issued in your name.

  2. Getting riders - 
    There are some riders that you can buy along with a decreasing term insurance plan. These include the critical illness rider and the accidental death benefit rider. Riders are add-on covers that you can buy at an extra cost. Riders give you a wider scope of coverage. 

  3. Paying the premium - 
    The premium should be paid regularly in order for the life cover to be active. You can choose to pay the premium annually, semi-annually, quarterly or monthly.

  4. Making the claim - 
    After the demise of the policyholder, the nominees need to initiate the claim process, which in itself is very simple. The nominees need to notify the insurance provider about the policyholder’s death. Then, the claim form needs to be filled in and submitted along with the important documents such as the death certificate, the policy document, etc. Once the insurance company runs a check and verifies the fact that there is no breach of the clause, the claim will be processed smoothly.

  5. Tax benefits - 
    You get a tax benefit of up to INR 1.5 lacs a year for the premium you pay towards the decreasing term insurance plan. This is a very beneficial feature of this type of term insurance.

These are the factors that function in cohesion to make a decreasing term insurance plan work. Once you understand how the plan works, you can decide whether or not it is a suitable term life cover for yourself. If it is, you can go ahead and purchase the plan right away.

Who Should Opt for Decreasing Term Insurance? 

The decreasing term insurance plans are suitable for the following categories of people:

  1. Someone who has a large loan - 
    Decreasing term insurance plans are also known as mortgage protection covers in many countries. This is because the main reason why people invest in such a policy is to cover a large loan or mortgage. If you are a person who has taken a large debt and does not want your family to be in a financial mess after your demise, buy a decreasing term insurance plan to ensure the policy pays for the debt after you are gone.

  2. A small business owner - 
    As a small business owner, you may have taken business loans or you may have mortgaged your property for the betterment of your firm. In such a case, you must take a decreasing term insurance plan. If anything happens to you, your family can pay off the loans and clear the mortgages. If that doesn't happen, your loved ones may have to sell everything and close the business as well to repay the debt after you die.

  3. Head of a family - 
    If you are the head of a family that has many dependent family members, you can consider getting a decreasing term insurance plan. Such a plan offers an affordable life cover, so paying the premium will become easier for you. Also, as time lapses, your responsibilities will reduce and so such a plan will prove to be useful for you and your family.

If you fall under any of these categories, you will definitely benefit from buying a decreasing term insurance plan.

Which is better: Increasing or Decreasing term plan? 

Both the forms of term insurance - increasing and decreasing, have their own sets of features and benefits. Let us do a comparative study to understand which is better suited for you:

 Increasing Term Insurance Decreasing Term Insurance 
Coverage The coverage is available at an increasing rate. The sum assured starts off at a specific rate. Then, each year it increases by 5% or 10%, depending on what you opt for. This makes the sum assured grow till it reaches 200% of the original amount.The coverage decreases as time passes. You start off with a fixed amount and then, each year, the sum assured reduces at a rate of 5%. This continues till the amount becomes zero. The plan is available for periods as long as 25 years.
Premium The premium usually stays fixed for the entire duration of the policy. At times, the insurance provider may also increase the premium as the policy progresses.The premium of a decreasing term insurance plan remains fixed for the entire duration of the plan. The premium is also lower compared to an increasing term plan premium or a level term plan premium. 
Suitable forThe plans are very suitable for people who have many dependent family members. The plans are suitable for those who take large loans and mortgages. It is also suitable for people who have familial responsibilities and look for a cheap form of life cover.

Best Decreasing Term Insurance Plans in India (2020)

Currently, there is only one decreasing term insurance plan available in India. It is the Saral Shield Plan from SBI Life Insurance. The plan offers two variants of decreasing term insurance. Let us take a look at the features of the plan in greater detail:

  1. Two variants - There are two variants available under this plan. They are the loan protection cover and the family protection cover. If you opt for the former, your sum assured reduction rate will depend on your loan interest rate. If you opt for the latter, a fixed sum of money will be deducted from the sum assured after each policy tenure.
  2. Policy period - The maximum policy period available under this decreasing term life insurance plan is 30 years.
  3. Maximum sum assured - You can get the maximum sum assured of INR 30 lacs when you buy the SBI Life Saral Shield Plan. The minimum sum assured available is INR 7.5 lacs.
  4. Riders - You can add riders at an added cost and extend the scope of cover under this decreasing term insurance plan from SBI Life.
  5. Other features - There are other useful features such as the free-look period available under the Saral Shield decreasing term insurance plan from SBI Life Insurance. 

As you can see, this is a very effective decreasing term insurance plan. If you are looking to get this type of term insurance for yourself, you would make a good decision by buying SBI Life Insurance’s Saral Shield Plan.

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