Increasing & Decreasing Term Plans

Cover that moves

In a level term plan the sum assured stays the same throughout. Increasing and decreasing term plans are term plans whose sum assured changes during the policy term, on a pattern fixed when the policy starts. They are still pure protection: a death benefit during the term and nothing on survival, unless the product says otherwise.

Increasing term

In an increasing term plan the sum assured rises at a rate fixed in the policy, for example 5% a year. The purpose is to keep the cover in step with rising living costs: as prices rise, a level sum assured buys less, so its real value to the family falls over a long term.

The policy states whether the increase is simple or compound, and the difference grows with time. A simple increase adds the same amount every year, a percentage of the original sum assured. A compound increase adds a percentage of the previous year's sum assured, so each year's addition is larger than the last.

Decreasing term

In a decreasing term plan the sum assured falls over time, usually following a loan repayment schedule set when the policy starts. Such plans are commonly sold with loans as credit-life or loan-protection cover, so that the outstanding loan can be repaid if the borrower dies.

The schedule is fixed at inception. In a decreasing term plan the cover at any point is the scheduled figure, as the policy states, not the figure in the lender's books, so it can differ from the actual loan balance after a prepayment or a change in the interest rate.

Cover sold with a loan

A lender may ask a borrower to have suitable cover, but it cannot make its own partner insurer's policy a condition of the loan. IRDAI's rules for corporate agents and RBI's guidance to lenders both bar forcing a particular policy on the customer, so the borrower may choose the insurer.

A borrower who is pressed to buy can complain to the bank and the insurer. If that fails, the regulators' grievance routes are RBI's Integrated Ombudsman Scheme, 2021 for the bank and IRDAI's Bima Bharosa portal for the insurance sale.

Where a policy is assigned to a lender for a loan, section 39 of the Insurance Act, 1938 provides that the assignment does not cancel the nomination; the nominee's rights are then subject to the lender's interest.

Rules at a glance

Key points

• Increasing and decreasing term plans change the sum assured on a pattern fixed when the policy starts.
• An increasing plan raises the sum assured at a rate stated in the policy, simple or compound, to keep pace with living costs.
• A decreasing plan usually follows a loan repayment schedule and is commonly sold as loan-protection cover.
• Because the schedule is fixed at inception, the cover can differ from the actual loan balance.
• A lender cannot force its partner insurer's policy on a borrower; the borrower may choose the insurer.

Common misunderstandings

• A decreasing plan does not track the lender's actual balance: it follows the schedule fixed at the start.
• A 5% increase is not one thing: simple and compound increases give different sums assured.
• Loan-protection cover from the lender's partner is not compulsory: the borrower may choose the insurer.

Questions people ask