What is Decreasing Term Life Insurance?

Suppose that your family members are dependent on you for financial support, but that over time, their need wanes. In certain situations, a decreasing term life insurance policy may be the ideal choice. Term life insurance policies of this kind are less expensive than others since they offer a death benefit that reduces with time.

What is Term Insurance? Advantages of Decreasing Term Life Insurance

What is term insurance? Before making a purchase, compare rates, policies, and regulations. Let’s now examine decreasing-term life insurance and its benefits:

You can select the starting death benefit amount and the policy length (often between five and thirty years) when you buy a decreasing term life insurance policy. The payoff that becomes available to your beneficiaries gradually reduces by a specific percentage, usually every month or year. Your beneficiaries would get the death benefit amount that was available at the time of your death if you passed away within the policy’s term.

Decreasing Term Life Insurance Offers Several Advantages

1. Affordability: Term life insurance is generally more affordable than permanent policies like whole or universal life. Decreasing term life insurance is even more cost-effective since the death benefit decreases over time.
2. Tailored Coverage: Decreasing term life insurance offers timely assurance in case something occurs to you if you have particular obligations or debts that will diminish over time, such as a mortgage, student loan, or business loan.
3. Flexibility: Unlike other types of life insurance, decreasing term life insurance allows you to customise the policy to fit your changing financial needs. You can choose the length of the policy and the rate at which the death benefit decreases.

Is Decreasing Term Life Insurance Right for You?

Determining whether decreasing term life insurance suits you depends on your circumstances. Consider the following factors:

1. Changing Dependency: If your loved ones will gradually need less financial support over time – such as when your children become financially independent or if your spouse has their income – decreasing term life insurance may provide adequate coverage.
2. Specific Liabilities: If you have significant debts that will decrease over time, such as a mortgage or business loan, a decreasing term life insurance policy can ensure that your family won’t have to bear the burden of these liabilities if something happens to you.

On the other hand, if you anticipate that your loved ones will still depend on your income even as you grow older, a non-decreasing type of life insurance may be more suitable.

Remember that everyone’s financial situation is unique. It’s always recommended to consult with a qualified financial advisor who can help you select the most appropriate life insurance policy based on your individual needs. Use a term insurance calculator to decide before buying any insurance plan.

Understanding Decreasing Term Insurance Plan

Decreasing term insurance is a variant of regular term insurance. The key difference is that the sum assured decreases yearly at a fixed rate. Let’s take a closer look at how this works.

Rahul, for instance, buys a decreasing term insurance policy with an annual decline rate of 5% and a total assured of Rs 1 crore. The payout promised to Rahul’s family in the event of an accident during the second year of the policy is Rs 95 lakhs (1 crore minus 5%). The family would earn Rs 90 lakhs in the event that he passes away in the third year.

When to Consider Buying a Decreasing Term Life Insurance Plan?

A decreasing-term life insurance plan is an excellent choice if you want to cover specific liabilities. If you have taken out a loan for a home or car or have any business liabilities, this plan ensures that your family won’t have to bear the burden of your debts after you’re gone. As you continue to pay off your loans, the sum assured will decrease accordingly.

Now let’s take a closer look at some examples, analogies, and scenarios to help solidify our understanding:

Example 1: Mortgage Protection

Imagine you take out a mortgage for your dream home. You want to ensure that if anything happens to you, your family won’t be burdened with mortgage payments they can’t afford. A decreasing term life insurance policy can provide valuable protection in case of your untimely demise. As you make mortgage payments over time, the outstanding balance and the coverage amount needed decreases. With decreasing term life insurance, you can align the coverage with your mortgage balance and protect your loved ones from additional financial stress.

Example 2: Business Loan Coverage

Suppose you’re an entrepreneur who has taken out a significant loan to fund your business venture. If something happens to you before the loan is fully repaid, your family could be left with the burden of repaying it. By opting for a decreasing term life insurance policy aligned with your loan amount and repayment schedule, you can secure their financial future and ensure the business loan doesn’t burden them.

Scenario: Growing Children Becoming Financially Independent

Let’s say you have children who are currently financially dependent on you, such as for their education or other expenses. As they grow older and earn income, their reliance on your financial support decreases. A decreasing term life insurance policy can offer coverage tailored to this changing dynamic, providing protection when they need it the most.

Conclusion

Decreasing term life insurance is a valuable tool for protecting your loved ones while aligning with their changing financial needs over time. Its affordability and customisability make it attractive for individuals with decreasing liabilities or dependents who will gradually require less financial support. By understanding your specific circumstances and consulting with a financial advisor, you can make an informed decision about whether decreasing term life insurance is right for you.