In life insurance, there are various plans designed to cater to specific financial needs. One such plan type is decreasing term insurance, which offers coverage that reduces over time. Let’s explore the concept, benefits, and applications of decreasing term insurance, to better understand its relevance.
Understanding Decreasing Term Insurance
A decreasing term insurance plan is a type of life insurance where the coverage value declines at a predetermined rate over the policy term. The premium generally remains constant throughout the policy duration, but the sum assured decreases progressively.
This plan can be best for individuals with financial obligations that decrease over time, such as home loans, car loans, or other liabilities. The coverage aligns with the outstanding debts, ensuring that dependents are financially secure without overpaying for coverage.
What Does Decreasing Term Life Insurance Mean?
To put it simply, decreasing term life insurance lets the insured amount decline steadily. It usually happens in synchronisation with the reducing financial responsibilities of the policyholder. Unlike level term insurance, where the sum assured remains constant, this plan is designed to meet specific needs that decrease over time.
Features of Decreasing Term Insurance
Gradual Decline in Coverage:
The sum assured reduces at a fixed rate.
Fixed Premiums:
While the coverage amount reduces, the premium remains unchanged.
Affordability:
Compared to level term plans, decreasing term insurance tends to be more affordable.
Decreasing Term Insurance vs. Level Term Insurance
Feature
| Decreasing Term Insurance
| Level Term Insurance
|
Coverage Amount
| Decreases Over Time
| Remains Constant
|
Premiums
| Fixed
| Fixed
|
Best For
| Loan Protection
| Family Income Replacement
|
Cost
| Lower
| Higher
|
Consider an individual with a ₹50 lakh home loan for 20 years. Instead of opting for a regular life insurance policy, they choose a decreasing term insurance plan where the coverage reduces in sync with the loan repayment. In case of the policyholder’s untimely demise, the remaining home loan balance is covered, protecting the family from financial distress.
Benefits of Decreasing Term Insurance
The benefits of this type of insurance are listed down below:
Cost-Effectiveness for Personal Portfolios
Since the coverage amount declines over time, decreasing term insurance is generally more affordable than level term insurance policies. This makes it an attractive option for individuals looking for budget-friendly coverage.
Help with Debt Repayment
Many policyholders opt for this plan to match their loan repayment schedule. If an individual has a home loan or an education loan, this policy can ensure that in case of their demise, the remaining loan amount is covered, relieving financial stress on their family.
Tax Benefits**
Policyholders can avail of tax deductions under Section 80C of the Income Tax Act for premiums paid towards the policy. Additionally, the payout is typically tax-free under Section 10(10D), making it a tax-efficient insurance plan.
Who Should Consider a Decreasing Term Plan?
A decreasing term insurance policy is a smart financial tool for individuals with reducing financial liabilities.
Homeowners with Mortgages:
The plan aligns with loan repayments, ensuring dependents are not burdened.
Business Owners with Loans:
Businesses with outstanding debts can secure repayment obligations.
Parents with Financial Dependents:
Those with young children can ensure financial stability while aligning coverage with their growing financial independence.
Role of a Term Insurance Calculator
A term insurance calculator can help in assessing the appropriate sum assured and policy term required based on outstanding debts and financial obligations. It can provide clarity on the premium amount and assist in making an informed decision about coverage.
Understanding what is decreasing term life insurance and how it aligns with financial responsibilities can help individuals make informed insurance choices. Utilizing a term insurance calculator can further enhance decision-making, ensuring appropriate coverage. Whether for mortgage protection or loan repayment security, decreasing term insurance serves as an effective and economical insurance solution.
** Tax exemptions are as per applicable tax laws from time to time.
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