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Certain monetary liabilities of people decrease with time and the logic behind the decreasing term insurance policy is the same. Let us understand details about this policy and its features, in this post.
When you are young with a family of dependents to look after, you have more liabilities as compared to when you are old and your kids are working and settled. As your liabilities decrease, your requirement of term insurance also decreases. Here, the decreasing term insurance policy comes into feature.
Let us understand the policy better.
As discussed above, in the decreasing term insurance policy the coverage amount reduces with time. This policy was introduced with the idea that people’s needs for insurance decrease with age and time. These policies are different from the standard policies because the coverage amount in decreasing term insurance lessens over time.
Let’s understand the decreasing term life insurance definition with the help of an example, suppose you have taken a loan and it needs to be repaid in 20 years. Now, if any untoward situation leads to your demise, your family members might get burdened with the loan amount along with other financial liabilities. So, in this case the Decreasing Term Insurance policy would come to the rescue of the family in paying off the mortgage. As the mortgage repayment amount decreases with time, thus the coverage amount received would also decrease accordingly.
In case of Decreasing Term Insurance, the value of death benefit received by the nominee of the policyholder decreases either monthly or annually. However, this value remains constant in case of standard life insurance policy along with constant premium amount.
For instance, suppose you bought a Decreasing Term Insurance plan with 20 years tenure and a sum assured of INR 20 lakh. Now, assume that you have a home loan going on with INR 20 lakh to repay. God forbid, if anything happens to you during the term of the repayment period, your family would receive the sum assured to repay the debt.
Let say, the sum assured of the policy decreases by 5% with simple ROI. Hence, from the end of the first policy year, the SI of the policy would come down by INR 1 lakh every year. As you continue to pay off the debt for the first 10 years of the plan, a corresponding amount reduces from the sum assured. Now, in case anything happens to you at the 10th year of the policy, your family would receive INR 10 lakh as total death benefit under the Decreasing Term Insurance that can be used to pay off the remaining loan amount.
This can be analyzed by the amount of debt, loan or mortgage that is due on you along with the interest levied on the debt. You have to make sure that the sum assured of the Decreasing Term Insurance policy doesn’t go down at a faster rate as compared to the outstanding loan amount. In that case, the purpose of the policy would not meet.
Hence, it needs careful analysis while deciding the coverage amount of a Decreasing Term Insurance. You must calculate the debt amount accurately so that you can estimate the required coverage amount. Preferably, the coverage amount of the policy should be either equal to or higher than the total loan amount.
Below are some differences between level term vs. decreasing term life insurance offered by insurance companies:
|Factors||Decreasing Term Insurance||Standard Term Insurance||Increasing Term Insurance|
|Sum Assured (SI)||The SI, in this case, decreases with time||The SI stays constant across the tenure of the policy||The SI increases at intervals|
|Eligibility (Who should buy)||Suits people who have debts or loans to pay off and the amount is likely to decrease with time||Suits people looking for a regular income source for family after his/her death||Suits people whose financial obligation is likely to increase over time|
To Sum Up
Decreasing Term Insurance is an ideal plan for people with debts as the decreasing term life insurance cash value goes down with time. Thus, anyone with a specific amount of debt/loan should buy a Decreasing Term Insurance. With this policy in hand, you can be sure that no burden will befall your family members in case you die before paying off the entire debt amount.
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