How does Decreasing Term Plan work?
How does Decreasing Term Plan work? Decreasing term life insurance is a kind of term insurance that covers a mortgage. So essentially the policy is bought to repay the loan if the policyholder dies before doing so himself. In decreasing term life insurance, the death benefit decreases at a pre-determined rate throughout the policy tenure. The premium however remains constant. This kind of an insurance policy is ideal for a person who has undertaken a huge loan or has mortgaged his properties for a specific period of time. The decreasing plan is usually bought for the same period of time as the loan, and as the loan amount diminishes (due to periodical repayments), the sum assured diminishes as well.
At what rate does the sum assured decrease in a decreasing term plan?
The rate at which the sum assured decreases is pre-determined. It is usually in accordance to the rate at which the loan is repaid. So if you pay combined annual EMIs of Rs. 2 lacs, the sum assured will also decrease by Rs. 2 lacs every year. A decreasing term plan is purely bought to cover your mortgages and it has no other function. As a result, the plan has to work in coordination with your bank loan.
What happens if I outlive the decreasing term life insurance policy?
If the policy holder outlives the decreasing term plan, he will not receive any benefit at the end of the policy period. This is because of two reasons. First and foremost, being a term plan, it doesn’t have a return component. Secondly, the sum assured decreases throughout the tenure of the policy and so at the end of the policy period the sum assured is equal to zero, making it impossible for you to receive any benefit.
If however, the policyholder dies within the policy period, the nominee will get the sum assured. This amount will most likely be equal to the remaining amount of the loan and the nominee can use it to pay the loan off.
What happens to the premium in a decreasing term plan?
In a decreasing term plan, the premium remains constant throughout the policy period, even though the sum assured of the policy decreases. This however should not be a matter of concern for you as the premium rates are very low in this kind of an insurance plan. Decreasing term life insurance is one of the cheapest kinds of term insurance and so the policyholders do not usually mind paying a consistent premium amount even when the sum assured decreases. These policies are cheap because the insurance company’s liability keeps decreasing as the policy proceeds. As a result, you are charged less.