According to the NHB (National Housing Bank of India), 97.52% of individual home loans1 had tenures of more than 7 years, indicating a preference for longer loan tenures to reduce monthly commitments. Therefore, for this category of people, decreasing term insurance offers a good solution.
Before choosing this type of policy, it is important to understand what term insurance is and how different coverage structures address different financial needs.
Key Features of Decreasing Term Plans
- The sum assured is decreasing in nature.
- It is meant to cover a declining liability.
- Used to provide mortgage protection insurance.
- Can be used to clear any loan liabilities.
- Provides a financial safety net during the period of repaying debt.
- Offers lower premiums compared to level term insurance with similar initial coverage.
Of all the kinds of term insurance plans, decreasing term insurance is particularly intended for liability protection purposes.
How Does A Decreasing Term Insurance Plan Work?
While buying a decreasing term insurance policy, the buyer chooses the starting value of the sum assured and the period of the policy. Subsequently, the insurer decreases the value of the sum assured periodically as per a pre-defined schedule.
The decrease in the sum assured is decided right at the start of the policy and is aligned with the repayment schedule of the loan.
Example
Assume Amit borrows a home loan worth ₹50 lakh for 20 years. To provide his family security from the burden of loan repayment - he decides to buy a decreasing term insurance policy with-
- Initial Sum Assured: ₹50 lakh
- Policy Term: 20 years
- Coverage Reduction: Linked to the outstanding loan balance
In the first year, the policy provides a life cover of ₹50 lakh.
In ten years, the loan balance may drop to ₹30 lakh, and the insurance amount may drop proportionally.
By year 18, the remaining loan balance may drop to ₹8–10 lakh, and the insurance sum assured will decrease proportionally.
The insurance money received by Amit's family in the event of his demise would help settle the outstanding loan amount. Borrowers can calculate the appropriate insurance amount using an online term insurance calculator.
Why Does The Sum Assured Decrease Over Time?
The sum assured under a decreasing term insurance policy decreases over time for several reasons including:
Declining Financial Liabilities
The first cause for the reduction in the sum assured is that financial liabilities decrease over the years. As financial liabilities decrease, the level of protection required will also decrease.
Loan Repayment Obligations
Home loans, vehicle loans, and educational loans are generally paid through EMIs. With every EMI, the outstanding liability decreases.
Just as EMIs pay off loan liabilities over time, a reducing term insurance policy ensures the cover is in proportion to liabilities.
Reducing Outstanding Debt
For instance, if someone has taken a home loan of ₹60 lakh, then the family might require ₹60 lakh worth of insurance initially. However, over the next 15 years, as they keep paying off the liability, the liability may reduce, and hence the level of cover will be lower.
Changing Financial Responsibilities
As one ages or completes major financial liabilities, the reliance on large lump-sum insurance will decrease.
Who Should Consider Buying a Decreasing Term Insurance Plan?
A decreasing term insurance plan might not be ideal for everyone, but the policy makes sense for:
Home Loan Borrowers
Individuals with long-term housing loans are among the primary users of decreasing term insurance plans.
Individuals With Long-Term Loans
Those who wish to repay loans related to education, business, or any other substantial liability may benefit from this policy structure.
Families Seeking Liability Protection
Families that are afraid of becoming burdened by debt obligations in the future can make use of decreasing term insurance to protect their financial future.
Individuals With Reducing Financial Obligations
Those whose financial responsibilities are expected to decline over time may prefer coverage that mirrors their changing needs.
Decreasing Term Insurance Vs Level Term Insurance
| Feature | Decreasing Term Insurance | Level Term Insurance |
|---|
| Coverage Amount | Reduces over time | Remains fixed |
| Sum Assured Movement | Declining | Constant |
| Primary Purpose | Loan and debt protection | Income replacement and family security |
| Premium Cost | Generally lower than the Level Term Insurance | Comparatively higher than the Decreasing Term insurance |
| Best Suited For | Borrowers and debt holders | Individuals seeking long-term family protection |
Conclusion
A decreasing term insurance policy is meant to provide protection against debts or liabilities that gradually decrease. It helps people obtain a decreasing sum assured that matches the reduction in their liabilities.
If someone wants to buy a decreasing term insurance policy to provide loan protection, it may be a suitable option, depending on their financial needs and the nature of their liabilities. Otherwise, if someone wants life cover for their family and income replacement benefits, then level term insurance may be a more suitable option.
However, before coming to such a conclusion, one must understand the meaning of term insurance, learn about the various types of term insurance plans, understand the main benefits of term insurance, learn how much term insurance cover may be required, and finally make use of the term insurance calculator.
Reference:
1https://www.nhb.org.in/wp-content/uploads/2026/02/NHB-TP-Report-2024-25-english.pdf (Page No. 57)
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