When planning for the future, it is important to consider the financial protection of your loved ones. One way to protect your family is through term life insurance. While many individuals are familiar with traditional term plans, there are options like decreasing term insurance that work effectively for managing loans and liabilities. This article will explain the features and benefits of decreasing term insurance, how it works and why it is a viable option for your financial planning needs.
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Decreasing term insurance is a type of term life insurance in which the coverage amount (the amount your family would get) decreases over time. The premium stays the same, while the payout amount decreases each year, following a specified schedule or aligned with your loan repayment.
For example, you take out a home loan and you are repaying a portion each year. You buy decreasing term insurance to make sure your family can pay off that home loan in your absence, and since you owe less each year, the insurance amount also decreases proportionally. This means that decreasing term life insurance is ideal for people who want coverage for liabilities that decrease over time, like home loans or education loans.
Let’s discuss the features of decreasing term life insurance policies:
The sum assured decreases automatically each year at the rate determined at the time of purchase. As your financial burden reduces (like repaying your home loan), insurance coverage also goes down.
Decreasing term insurance, like standard term plans, is typically issued for a limited period of time. If the policyholder survives the term, the policy ends without any payout (these plans do not offer maturity benefits.
Decreasing term plans generally have lower premiums than level term insurance plans with the same initial sum assured. This is because the coverage amount reduces over time.
You can pay your insurance premiums monthly, quarterly, semiannually or annually. Some insurers even offer the option to pay premiums for a limited number of years instead of the entire policy term, providing greater flexibility.
Like standard term policies, decreasing term insurance (reducing term life insurance) plans can be enhanced with add-ons. However, the availability of riders depends on the insurer and the specific product.
Here’s a step-by-step explanation of how life insurance decreasing term works:
Suppose you’ve taken a home loan of ₹30 lakh for 15 years. You buy a decreasing term insurance policy of ₹30 lakhs for the same term. Every year, the amount to be paid in loans decreases. Let’s assume that the insurance coverage also decreases by ₹2 lakh every year.
| Policy Year | Sum Assured |
| Year 1 | ₹30 lakh |
| Year 2 | ₹28 lakh |
| Year 3 | ₹26 lakh |
| Year 4 | ₹24 lakh |
| Year 5 | ₹22 lakh |
| Year 6 | ₹20 lakh |
The key advantages of decreasing term life insurance are as follows:
This type of insurance is ideal for individuals with loans that decrease in value over time. It ensures that liabilities don’t burden the family in case of an untimely demise.
Because the insurer’s liability reduces over time in decreasing term insurance, these policies typically cost less than level term plans providing the same initial coverage.
Whether it’s a home or car loan, reducing term life insurance provides the confidence that your family won't be saddled with debt if something happens to you.
While the sum assured decreases in decreasing term insurance, the premiums paid typically remain the same. This makes it easier to keep the policy going for the full term.
Decreasing term insurance is ideal for:
| Feature | Level Term Insurance | Decreasing Term Insurance |
| Sum Assured | Constant | Reduces over time |
| Premium | Constant | Usually constant |
| Best Suited For | Income replacement, family protection | Loan or liability protection |
| Cost | Higher | More affordable |
| Maturity Benefit | None | None |
Generally, term insurance policies provide a fixed sum assured throughout the policy term. However, some insurers offer options such as decreasing term insurance or highly flexible term plans that allow you to modify your coverage during the policy term.
One such example is ACKO’s unique pure term plan, the ACKO Life Flexi Term Plan, which enables policyholders to increase or decrease their coverage based on changing financial needs, providing greater control and convenience. Learn more about the ACKO Life Flexi Term Plan now.
A decreasing term policy allows you to protect your financial obligations at a lower cost than permanent or whole life insurance. By having this plan in place, you can be sure you aren't paying for more protection than you need. While decreasing term may not be your best option for income replacement, it still plays a role in covering various financial obligations. The first step in considering this plan is to look at your existing debts. If the amount you owe on your loan decreases over time, decreasing term insurance may be an ideal fit.
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Reviewed by Vaibhav Kumar Kaushik 
Acko Technology & Services Private Limited
#36/5, Hustlehub One East, Somasandrapalya, 27th Main Rd, Sector 2, HSR Layout, Bengaluru, Karnataka 560102
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