When it comes to term insurance, everyone may have a different set of coverage needs. After all, people’s incomes, expenses, lifestyles, liabilities, and so on may differ to quite an extent, and so may their coverage requirements. Thus, there may be no one-size-fits-all term insurance policy.
It may help to know that term insurance policies come in different types, one of which is a decreasing term insurance plan. What does the decreasing term insurance plan mean, and would it be a suitable product for you? Read on to know more.
What is A Decreasing Term Insurance Plan, and How Does it Work?
A decreasing term insurance plan is a type of term insurance policy wherein the sum assured decreases at a fixed rate throughout the plan’s tenure. The change in the sum assured, however, may not influence the premium. It may stay the same throughout the plan’s duration.
A decreasing term insurance plan may be a suitable product for those individuals whose need for term insurance may reduce over time.
Now that you may have an idea of what a decreasing term plan is let’s see how it may usually work:
- As mentioned previously, in a decreasing term plan, the sum assured decreases each year. The rate of decrease may be laid down in the policy wording. The policyholder may finalize this aspect at the time of purchasing the term plan.
- If the policyholder passes away at any point during the tenure, the sum assured applicable for that year may be paid out to the nominees.
- The premium of a decreasing term plan may be low as a result of the coverage reducing over time.
What Are the Advantages of a Decreasing Term Insurance Plan?
Following are some of the advantages of a decreasing term insurance plan that you may enjoy if you opt for it:
Coverage that aligns with your changing needs
When you are young and starting a new family, you may take loans or get into debt to manage the incoming expenses. Taking a car loan, a home loan, an education loan, and so on may be common. As a result, at this point in life, the liabilities on your shoulders may be high. And if any unfortunate event were to occur with you, the liabilities may transfer to your family’s shoulders. A high sum assured may be helpful for them in this scenario.
However, as you age over time and your income grows, you may gradually pay off your debts and liabilities. Your family may not have to worry about high debts in your absence. Thus, the need for a high sum assured may also reduce over time, for which a decreasing term insurance plan may be useful.
Affordability
A decreasing term insurance plan may offer you the type of coverage you need at an affordable premium. What’s more, the premiums may be low from the beginning instead of reducing over time. This may allow you to receive coverage without disrupting your budget throughout the tenure.
Flexibility
A decreasing term plan, like other life insurance plans, may be supplemented with additional coverage in the form of riders, such as the critical illness rider, the waiver of premium rider, the family income benefit rider, and so on. These riders may come at an extra cost but may help you and your family deal with unexpected financial challenges.
Tax Benefits
With a decreasing term plan, you may be able to claim tax deductions against its premiums under Section 80C of the Income Tax Act of 1961. The highest deduction you may be able to claim annually is Rs 1.5 lakhs under the Old tax regime. Your family, too, may be able to claim tax exemption on the death benefit payout if you were to pass away. Section 10 (10D) of the Income Tax Act of 1961 may allow for this tax exemption. These tax benefits may be subject to the satisfaction of terms and conditions mentioned therein.
Some important points to note on term insurance tax benefits:
To claim the above tax benefits, the premium of a policy purchased after 1st April 2012 may not exceed 10% of the death sum assured of the plan. If the policy is purchased before the given date, the limit is 20% of the death sum assured.
Since the sum assured changes over time in a decreasing term insurance plan, you may want to consult a tax expert or a financial advisor to get a clearer picture.
Conclusion
A decreasing term plan may prove to be useful to many people, but especially to younger individuals whose liabilities may reduce gradually over time. A decreasing term plan may help you and your loved ones have the advantage of term insurance coverage at a reduced rate. For this reason and to enjoy peace of mind, you may want to consider buying a decreasing-term insurance plan.
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