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Decreasing Term Insurance Plan

Many of us take loans to accomplish our financial goals like buying your own house, buying your dream car, etc. The loan amount for such kind of asset creation is big and the same is repaid through EMI’s. The repayment term varies between 10 to 30 years. The EMI’s for the loan repayment consumes a major proportion of the income of a household. Decreasing Term Plan

Imagine what if that income stops due to the untimely death of the earning member? Will the EMI will also stop? Will the loan be waived off? The answer is No unless the loan is supported by something known as “Decreasing Term insurance” plan.

What is a Decreasing Term Plan?

Decreasing term insurance plan is a term plan which is usually bought as a complimentary product when any kind of loan or mortgage is taken.

Suitability: The main purpose of this term plan is to protect the family members or dependents from the burden of repayment of the outstanding loan amount in case the earning member (on whose name the loan is taken) dies an untimely death.

As the name suggests, under decreasing term insurance, the sum assured decreases in a pre-defined percentage annually. The sum assured taken is usually equal to the loan amount and the insurance policy term is equal to the loan repayment term. As the loan amount decreases year on year, the sum assured also decreases proportionately.

Main features of a Decreasing Term Plan:

Decreasing term plan is characterized by the following main features:

The sum assured decreases annually as per the pre-defined percentage under decreasing term plan on an annual basis in conjunction with the loan amount. At maturity of the policy term, the sum assured becomes zero as the outstanding loan amount is repaid and becomes zero.
In the event of an untimely death of the insured, the decreased sum assured applicable in the year of death is payable to the nominee (which could be further used to repay the outstanding loan) and the policy terminates.
The premium of the decreasing term insurance plan remains same and does not decrease just like sum assured. The premium for the decreasing term plan is relatively the cheaper than a pure term plan also. This is because year on year the quantum to pay the claim amount by the insurance company reduces and eventually nears to zero.
The premiums paid towards a decreasing term insurance policy offers tax benefit under section 80 C up to Rs 1.5 L of the Income Tax Act,1961. It also offers tax rebate under section 10 (10 D) which allows death benefit as a tax-free amount.

How a Decreasing Term Plan works?

Let us understand the working of a decreasing term plan with the help of an example:

Rahul has taken a home loan of Rs 20 Lakh for 20 years, simultaneously he has opted for a Decreasing Term Insurance Plan with sum assured as Rs 20 Lakh with a 20-year policy term.

Sum Assured Decrease %: 5% (simple rate) per annum

Rahul will pay the EMI for his home loan and will pay the premium for his Decreasing term plan.

Let us understand how it works?

Policy Year Applicable Sum Assured (INR) Sum Assured decrease at the end of the year
At the end of 1st Policy Year 19 Lakh 1 Lakh
At the end of 2st Policy Year 18 Lakh 1 Lakh
At the end of 3rd Policy Year 17 Lakh 1 Lakh
At the end of 4th Policy Year 16 Lakh 1 Lakh
At the end of 5th Policy Year 15 Lakh 1 Lakh
At the end of 6th Policy Year 14 Lakh 1 Lakh
At the end of 7th Policy Year 13 Lakh 1 Lakh
At the end of 8th Policy Year 12 Lakh 1 Lakh
At the end of 9th Policy Year 11 Lakh 1 Lakh
At the end of 10th Policy Year 10 Lakh 1 Lakh
At the end of 15th Policy year 5 Lakhs 5 Lakh *(from 11h policy year to 15th policy year)
At the end of 15th Policy year Nil 5 Lakh *Policy Maturity year

Case 1: Rahul dies an untimely death, at the end of the 10th policy year

The original sum assured is Rs 20 Lakh which has been decreased to Rs 10 Lakh at the end of the 10th policy term. The nominees will receive a death benefit of Rs 10 Lakh which could be used to repay the outstanding home loan.

Case 2: Decreasing Term Policy Matures

Rahul has been paying regular premiums through the policy span of 20 years (to secure his family from the burden to repay the outstanding home loan amount) and now the decreasing term policy reaches the maturity stage. No maturity benefit is payable to Rahul as it is a term insurance policy. Rahul’s home loan also has been paid off now.

How can you buy a Decreasing Term Plan?

Decreasing term plan can be bought from the insurance company directly, or it could be bought from the lender institution such as a bank from where you have opted to take a loan. Banks sell insurance through a bancassurance channel where they have the rights to sell the insurance of their partnered insurance company.

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