What is Decreasing Term Life Insurance?

What is Decreasing Term Life Insurance ? Decreasing term life insurance is a kind of term life insurance where the sum assured decreases as the policy period proceeds. The rate at which the value decreases is pre-determined. It is important to remember that though the sum assured decreases, the premium remains constant throughout the policy. A decreasing term plan is usually bought to protect the family members against a mortgage and so it is also known as mortgage protection insurance.

How does decreasing term life insurance work?

In a decreasing term plan, the sum assured or the deatch benefit reduces throughout the policy period. This is because such a plan is normally bought to cover a mortgage or a loan. So as with time you pay off the loan, the sum assured decreases as well. Let us understand this with an example. Rajesh buys a house for Rs. 50 lacs. He takes a loan of Rs. 40 lacs from the bank for 30 years. He has to pay Rs. 10,000 every month (and Rs. 1,20,000 annually) as the EMI. As a result, his term plan’s face value also decreases by Rs. 1,20,000 every year. By the end of the term (which is equivalent to the loan period, i.e. 30 years), the face value will reach zero and he will not be entitled to get anything back. However, if he happens to die during the tenure of the policy, his nominees will receive the sum assured which will be similar to the remaining loan amount. They can then use the money to repay the loan.

Who needs decreasing term life insurance?

Anyone with a large loan or a mortgage would benefit from having a decreasing term life insurance. These plans are not expensive at all and provide you with the peace of mind that if anything were to happen to you pre-maturely, your properties would remain with your family and not be taken away by the moneylenders. So if you have recently taken a large loan or have a mortgage, go for a decreasing term plan. It will cost you very little, but it will prove to be very beneficial.

For how long should a decreasing term life insurance policy be taken?

Since a decreasing term plan is bought to cover a specific loan or mortgage, you should ideally buy it for a term equal to the loan repayment term. So if you have taken a loan for 20 years, buy a decreasing term plan for 20 years as well. The plan will work in coordination with the loan and as you pay the loan off, the sum assured of the insurance plan will decrease too and with the complete repayment of the loan, the policy will terminate as well. It does not make sense to buy such a plan if you do not have a mortgage to cover.