Difference Between Level Term and Decreasing Term Life Insurance

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Many have this misconception that all life insurance policies are the same. However, that is not true. While opting for a life insurance policy, individuals can choose between level term and decreasing term life insurance policies. While both of these insurance policies have their own benefits, there are a few notable differences between the two.

In this guide, we will help you understand these differences so that you can choose the best option per your financial needs and planning.

A level term policy is a type of term insurance plan, where you have to pay a fixed amount of premium throughout the policy tenure without increased rates every year. Therefore, this is the most common type of life insurance policy and generally appeals to young families looking forward to protecting their finances in the event that one parent (or both) dies.

For example, you have opted for a level term life insurance policy for, say 25 years and the insurance provider charges a monthly premium during that tenure. Additionally, while applying for insurance, you will have to choose the coverage amount which remains fixed throughout the coverage tenure. In this case, let us assume, you choose a coverage amount of ₹ 1,00,000. The insurance provider will pay your family ₹ 1,00,000 in case you pass away during the 25 year tenure.

A decreasing term life insurance policy has a feature that allows policyholders to reduce the benefits on an annual or monthly basis. Consequently, the coverage amount also decreases as the policy term comes to an end or until the policyholder claims the coverage.

For example, you have purchased a decreasing term life insurance policy for a term of 30 years with an annual reduction rate of 6% and have chosen a coverage amount of ₹ 1,50,000. In case you die in the first year, the beneficiaries will receive the total coverage amount of ₹ 1,50,000. However, if you pass away after a year and during the policy term, the coverage amount will reduce as per the reduction rate.

Things to Know Before Selecting a Term Life Insurance Policy

Individuals wanting to opt for a level term or decreasing term insurance policy must know the following things before purchasing it:

• Determine the Coverage Amount: In order to establish the amount of coverage one actually needs, candidates should consider assessing several aspects, such as:
  • Their age
  • Financial responsibilities
  • Future financial requirements of their family
  • Basic expenses as per lifestyle habits
  • On-going loans
• Determine the Insurance Policy Period: Candidates must opt for a policy period based on their age, retirement plan and other financial responsibilities. Generally, young candidates can consider opting for a longer policy period. Further, those who have a retirement plan should opt for a policy period until they reach their retirement age.
• Look for Feasible Payout Options: The policy's premium amount will be based on the payout option one chooses. Individuals have the option of choosing between a regular monthly income payout and a lump sum payout. Policyholders must choose the option that best suits their requirements.
• Choose the Correct Insurer: With a number of insurance providers offering different types of policies, one must choose the insurer as per their needs. In this regard, applicants can choose their insurance providers after assessing several factors. Some of these are as follows:
  • Claim settlement ratio
  • Solvency ratio
  • Financial background
  • Market reputation

Choosing between level and decreasing term life insurance depends on an individual's needs. For both insurance products, beneficiaries receive a death benefit in case the policyholder passes away during the policy term. Further, the insurance premiums for both remain stable throughout the policy tenure.

In case an individual wants protection against a certain loan, a decreasing term life insurance policy can be an ideal choice. However, level term life insurance can be a better choice, if individuals want to cover their family's basic expenses in the event of their death.

To sum it up, one should consider the above-mentioned pointers while choosing between a level term and decreasing term insurance policy. While both of these have their own advantages, there are certain differences that make them unique in their own way.