What is ‘Decreasing Sum Assured’ in Term Insurance?

Definition:

Decreasing sum assured in term insurance refers to a policy where the final coverage amount, also known as the sum assured, reduces over time at a fixed rate based on a predefined schedule.

This feature is often found in certain term life insurance plans, especially in decreasing term insurance, where the sum assured reduces at regular intervals throughout the policy term, usually in synchronisation with decreasing financial obligations, like loans or mortgages, etc. 

Contents

• Key Takeaways
• How Does Decreasing Sum Assured Work in Life Insurance?
• Decreasing Sum Assured vs Level Sum Assured
• Why Decreasing Sum Assured Matters For Policyholders?
• Conclusion
• FAQs

Key Takeaways

• Suitable for individuals with loan repayments.

• The reduction schedule can be aligned with the repayment of the loan/debt.

• Premiums for a term insurance policy with a decreasing sum assured are cheaper than those for level term life or permanent life insurance policies. 

• Note that decreasing sum assured is not a standard feature across all term insurance policies available in the market; only some policies offer this benefit to the policyholder.

How Does Decreasing Sum Assured Work in Life Insurance?

There are 3 key essential steps to understanding how decreasing sum assured works in a term life insurance plan.
Here's how it works:

1. Initial Coverage: When the policy starts, the sum assured is at its highest. Let’s say ₹1 crore.

2. Scheduled Reductions: At regular intervals, the sum assured decreases based on a fixed schedule, say, by 5% or 10% per year.

3. End of Term: By the end of the policy term, the sum assured might be minimal or even zero (depending on the plan design), especially if your debts are fully repaid.

Here is an example:

Rahul, aged 35, takes a home loan for 20 years worth ₹50 lakhs. He takes a term life insurance plan and chooses a decreasing sum assured.

Note:

• This is a tentative calculation for your understanding. Actual numbers may vary.

• If Rahul passes away in year 10, the insurer will pay ₹20 lakhs, which is the policy cover at that time. This payout can help clear the outstanding loan.

Decreasing Sum Assured vs Level Sum Assured

Sum Assured is defined as the amount which the insurer pays out when a claim is made. However, in the case of a decreasing sum assured in term insurance, the amount to be paid out by the insurer reduces over time. 
Remember, all life insurance policies have a sum assured - it's the base concept.

• Decreasing (reduces over time)

• Level (remains constant throughout)

Why Decreasing Sum Assured Matters For Policyholders?

Here are a few important factors a policyholder should know before getting a plan with a decreasing Sum Assured:

Benefits of decreasing sum assured:

• A cost-effective way to manage short-term or reduce financial obligations.

• The sum assured is aligned with loan repayment timelines and also reduces the risk for the insurer.

Risks of decreasing sum assured:

• Coverage reduces every year. 

• Not ideal for family protection or income replacement.

Applicable situations of decreasing sum assured:

• Loan protection against home, education, business, and personal loans.

• Mortgage-linked term plans are offered by banks or NBFCs (NBFCs stand for Non-Banking Financial Companies).
  Group credit life insurance schemes.

Conclusion

A decreasing sum assured is a viable alternative for individuals who want a lower premium but still seek peace of mind knowing outstanding loans are covered in case of their death. It reduces the financial burden on dependents and ensures that lenders receive the remaining loan amount. This type of plan also minimises the insurer’s risk. In short, it’s a systematic and practical insurance option for individuals with loans that reduce over time.

FAQs

Here are the answers to the most common questions related to decreasing sum assured in term insurance.

1. What is a decreasing sum assured?

Decreasing sum assured means the cover amount reduces over time. It’s often used in plans where financial responsibilities, such as a loan, also decrease each year.

2. What types of debts can be covered with a decreasing sum assured policy?

Many long-term debts that reduce over time can be covered with a decreasing sum assured policy.

3. What happens in a decreasing term policy?

In a decreasing term policy, the cover amount (sum assured) goes down gradually over time, usually in line with a loan or other debt.

4. Which is better, level or decreasing life insurance?

It depends on your needs. Level term insurance keeps the cover fixed and is better for long-term family protection. Decreasing term insurance works well if you're covering a loan or debt that reduces over time.

5. Why would someone want decreasing term life insurance?

Decreasing term insurance is cost-effective for people with large loans. If you have a home loan or any debt that reduces year by year, this type of plan ensures your loan is covered without paying for extra coverage you don’t need.

6. Does decreasing term insurance offer any value or savings?

A term policy with decreasing term insurance is a protection-oriented term life insurance plan. It generally does not have any savings component. This is because there is usually no maturity benefit.

7. Who might benefit from decreasing term life insurance?

A decreasing term insurance plan is ideal for people with financial obligations that reduce over time. These obligations include home loans, business owners' repayment of fixed loans, and children’s education payments. 

8. What is the sum assured?

In life insurance policies, the guaranteed fixed amount paid by the insurer is called the sum assured. It is pre-defined when the policy is bought and forms the base coverage of the plan.

9. Can I reduce the sum assured?

Yes, you can change your life insurance policy sum assured (coverage amount) as long as your insurer allows it. It is important to check the policy terms or speak with your provider to determine if this option is available.

10. Is decreasing term insurance worth it?

Yes, if your financial needs reduce over time, like a home loan that you’re repaying. You get coverage that matches your reducing liability and pays lower premiums compared to regular term plans.

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