A Term Insurance Plan is an agreement entered between the insured & insurance provider, where in the event of an unfortunate demise of the insured, the nominee receives a certain amount of money called a “Death Benefit” from the insurance company. After understanding What is Term Insurance, now let us go through one of the types of term insurance plans, i.e. a Decreasing Term Plan.
In most cases, the decreasing term plan works on the same lines as a term plan does. A decreasing plan is one where the coverage keeps on decreasing with the passage of time. The amount of the sum assured decreases at a pre-determined rate according to the remaining loan amount. But here, the premium amount remains the same, which makes this plan cost-effective.
Key Takeaways
- The coverage provided here in this plan decreases over a period of time, hence matching with the future liabilities.
- Under this plan, premiumsare normally lower in comparison to level-term plans, hence providing cost-effective financial protection.
- This provides a scope of flexibility, where an insured can customise the decreasing rate depending on their schedule of repayment.
- It is normally bought to secure the personal assets.
- It might be a lender bank’s requirement as well to provide a guarantee with the leftover loan balance till maturity in case of the insured’s sudden demise.
- It behaves similarly to the mortgage amortisation schedule.
How Does Decreasing Term Plan Work?
This plan decreases the coverage amount over a period& is used to meet the financial obligations, which will be decreased over time. Under this plan, the death benefit keeps on decreasing with the passage of time. Let us see how it works:
- To start with the decreasing plan, select the policy tenure & the amount of death benefit. The choice of these factors will depend on the debts, loans, mortgage payments, & financial obligations, which will decrease over a period.
- Mention the names of beneficiaries who will be receiving the death benefit in your absence.
- To maintain your policy, pay the policy premium on time regularly.
- With the passage of time, the death benefit also decreases, aligning well with the diminishing financial obligations of the insured.
- To maintain your policy, regularly paythe premium amount & review the policy.
- The amount of death benefit will become zero when the policy is near its closure, & no coverage is now left.
Eligibility Criteria
Provided are the eligibility parameters to be met to avail of a Decreasing Term Insurance:
- The insured’s minimum age should be 18 years.
- The insured’s maximum age should be 65 years.
- There should be stability in income to ensure a regular payment of premiums.
- A medical check-up may be required before approval is given to analyse the health conditions.
- In some cases, you may be required to provide proof of your present liabilities.
- The policyholder must be an Indian citizen.
How to compare Decreasing Term Plans
You can compare the decreasing term insurance plans on the basis of mentioned criteria:
| Criterion | Comparison Factor |
| Sum Assured Vs. Liability | Make sure that the amount of sum assured meets your liabilities, i.e. the loan repayment schedule. |
| Premium Structure | Compare the premiums of different insurance companies on the basis of affordability. |
| Policy Features | Look out for additional features, if any, such as critical riders. |
| Claim Settlement Ratio | Evaluate the claim settlement ratio of the insurance company to ensure the reliability of future payouts. |
| Customer Service | Ensure consistent customer support should be available from the insurance company for smooth functionality & management. |
How does a term insurance calculator help calculate the decreasing term plan premium?
The premium of a decreasing term plan is calculated using a Term Insurance Calculator considering the below factors:
- Age: Younger individuals have to pay lower premium amounts than older ones due to lesser health risks.
- Gender:The gender of the policyholder also affects the premium amount.
- Income:The income of the policyholder also affects the premium amount.
- Health Condition: The present health condition, i.e.illnesses or diseases, if any, can also affect the premium amount.
- Smoking Habits: As smoking leads to health issues, it also has an impact on the amount of premium.
- Occupation: Risky occupations, such as construction, pilots, & firefighters, also affect the premium.
- Policy Tenure: The tenure of the policy also affects the premium amount.
- Sum Assured: The amount of the desired sum assured also affects the premium amount.
- Add-ons: The number of riders added to the policy affects the premium amount.
Decreasing Term Insurance Plan, Level Term Insurance Plan: A Comparison
Below are the differences between A Decreasing term plan & a Level Term Plan:
| Basis | Decreasing Term Plan | Level Term Plan |
| Coverage Amount | It decreases with the passage of time. | It remains constant throughout the policy tenure. |
| Premium Amount | It also remains fixed, but the payout amount diminishes over a period of time. | It remains constant throughout the policy tenure. |
| Death Benefit | It reduces with the passage of time. | Fixed amount of death benefit |
| Timings | Can be opted against repayment of mortgage loan | Can be opted against interest-only mortgage |
| Affordability | It is sometimes the cheapest form of term plan. | It is costlier than the decreasing term plan. |
Conclusion
A decreasing plan is best suited for those individuals having reduced financial liabilities, like home loans. As we know, the main objective of a term plan is to secure the financial future of family members in your absence. But if your dependents are such that they will not remain dependent for a longer period, a decreasing plan can be opted for.
