Increasing & Decreasing Term Plans
Definition
Increasing and Decreasing Term Plans are specialized variants of pure term insurance where the sum assured changes over the policy term instead of remaining constant. In an Increasing Term Plan, the sum assured rises at a predetermined rate (typically 5–10% per annum or linked to inflation indices like CII) to account for inflation and the growing financial needs of the family. In a Decreasing Term Plan, the sum assured reduces over time, usually in line with an outstanding loan balance, making it ideal for loan protection.
Both variants are regulated by IRDAI under the Non-Linked Insurance Products Regulations, 2019. In India, decreasing term plans are commonly sold as Mortgage Protection Plans or Loan Protection Plans by banks and housing finance companies alongside home loans, vehicle loans, and business loans. Increasing term plans are less common as standalone products but are offered as optional features within comprehensive term plans by insurers such as HDFC Life, Max Life, ICICI Prudential, and Bajaj Allianz Life.
Explanation in Simple Language
An Increasing Term Plan recognizes that ₹1 crore today will not have the same purchasing power 20 years from now. If inflation averages 6% per year, ₹1 crore in 2024 would be equivalent to approximately ₹31 lakh in 2044 in terms of real purchasing power. An increasing term plan addresses this by growing the sum assured each year, so the death benefit keeps pace with the rising cost of living. For example, a plan starting at ₹1 crore and increasing at 5% annually would provide approximately ₹2.65 crore by the 20th year.
A Decreasing Term Plan works in the opposite direction. It is designed to match the reducing balance of a loan. When a borrower takes a ₹50 lakh home loan for 20 years, the outstanding principal reduces each year as EMIs are paid. A decreasing term plan mirrors this reduction, so the sum assured at any point roughly equals the outstanding loan balance. If the borrower dies in year 10 when the outstanding loan is ₹28 lakh, the insurer pays approximately ₹28 lakh — enough to clear the loan. This makes it cheaper than a level (flat) term plan.
Real-Life Indian Example
Scenario 1 — Increasing Term Plan:
Ankita Joshi, a 30-year-old doctor in Jaipur, purchased an increasing term plan from Max Life with a base sum assured of ₹1 crore and a 10% annual increase for 30 years. The annual premium was ₹18,200 (compared to ₹11,500 for a flat ₹1 crore plan). By year 15, the cover would have grown to approximately ₹4.18 crore, and by year 30, to approximately ₹17.45 crore. Ankita's rationale was that her household expenses, children's education costs, and lifestyle needs would increase significantly over 30 years, and a flat ₹1 crore cover would be inadequate in 2054.
Scenario 2 — Decreasing Term Plan:
Suresh Patil, a 35-year-old government employee in Nagpur, took a ₹40 lakh home loan from SBI for 20 years. SBI offered a decreasing term plan (SBI Life Loan Protection Plan) where the sum assured started at ₹40 lakh and reduced annually in line with the outstanding loan schedule. The total single premium for this plan was ₹28,500 (paid once, upfront, and added to the loan amount). If Suresh died in year 12 when the outstanding loan was ₹18 lakh, SBI Life would pay ₹18 lakh directly to the bank, clearing the loan for Suresh's family.
Numerical Example
Comparison: Level vs. Increasing vs. Decreasing Term Plan for a 30-year-old Male, 25-year Term:
Option A — Level Term Plan (₹1 crore flat):
Sum Assured throughout: ₹1,00,00,000
Annual Premium: ₹11,000
Total Premium over 25 years: ₹2,75,000
Option B — Increasing Term Plan (₹1 crore base, 5% annual increase):
Year 1 SA: ₹1,00,00,000
Year 10 SA: ₹1,55,13,282
Year 20 SA: ₹2,52,69,502
Year 25 SA: ₹3,22,51,000
Annual Premium: ₹16,500
Total Premium over 25 years: ₹4,12,500
Option C — Decreasing Term Plan (₹40 lakh home loan protection, 20-year term):
Year 1 SA: ₹40,00,000
Year 5 SA: ₹35,20,000
Year 10 SA: ₹26,80,000
Year 15 SA: ₹14,40,000
Year 20 SA: ₹0 (loan fully repaid)
Single Premium (one-time): ₹24,000–30,000
OR Annual Premium: ₹3,200/year for 20 years
Cost per ₹1 lakh of average cover over the term:
Level: ₹11 per lakh per year
Increasing: ₹7.7 per lakh per year (cheapest on per-unit basis as cover grows)
Decreasing: ₹16 per lakh per year (but total premium is lowest in absolute terms)
Policy Clause Reference
IRDAI (Non-Linked Insurance Products) Regulations, 2019 — Regulation 11: For increasing term plans, the rate of increase in sum assured must be specified at inception and cannot be altered during the policy term. The maximum annual increase permitted is 15% of the initial sum assured (simple) or 10% compound. For decreasing term plans sold as loan protection products, the sum assured schedule must mirror the loan amortization schedule provided by the lending institution. IRDAI Circular No. IRDAI/LIFE/CIR/GI/038/03/2021: Banks and NBFCs selling loan protection (decreasing term) plans must provide the borrower with an option to choose their own insurer; bundling insurance with a loan from a specific insurer without offering alternatives is prohibited under Section 41 of the Insurance Act, 1938 (anti-rebating provisions).
Claim Scenario
Manoj Deshmukh, aged 38, had taken a ₹60 lakh home loan from HDFC Bank with a 25-year tenure. The bank arranged a decreasing term plan from HDFC Life with a single premium of ₹42,000 financed into the loan. The sum assured was structured to reduce in line with the loan amortization schedule.
In the 7th year of the loan, Manoj suffered a fatal heart attack. At that point, the outstanding home loan balance was approximately ₹49.2 lakh. His wife Aarti filed a claim with HDFC Life, submitting the death certificate, loan account statement, and nominee documentation.
HDFC Life verified the claim and determined the sum assured applicable in year 7 of the decreasing schedule was ₹49.5 lakh (closely matching the outstanding loan of ₹49.2 lakh). The insurer paid ₹49.5 lakh directly to HDFC Bank, which closed the home loan account. The marginal excess of ₹30,000 was paid to Aarti. The family retained the house without any further EMI obligation. The total cost of this protection had been a one-time premium of ₹42,000.
Common Rejection Reason
Claim rejections specific to increasing and decreasing term plans include: (1) For decreasing term (loan protection) plans — policy not in force because the single premium was refunded when the borrower prepaid the loan or refinanced with another bank, but the borrower forgot to arrange new coverage. (2) Discrepancy between the sum assured schedule and the actual outstanding loan — if the borrower took additional top-up loans not covered under the original decreasing term plan, the payout may be insufficient to clear the full loan. (3) For increasing term plans — premium non-payment leading to lapse; since increasing term plans have higher premiums, they are more susceptible to lapse. (4) For both variants — non-disclosure of pre-existing conditions at the time of purchasing the plan, particularly when the plan was sold quickly at the bank branch as an add-on to the loan without proper health declaration.
Legal / Arbitration Angle
In the case of Smt. Fatima Begum vs. HDFC Life Insurance & Axis Bank (Insurance Ombudsman, Mumbai, Award No. IO/MUM/A/LI/2023/0156), the complainant's husband had taken a ₹45 lakh home loan and was sold a decreasing term plan by the bank's staff. The husband died in the 4th year, but the claim was rejected because the insurer alleged that the health declaration form was filled by the bank staff without the borrower's knowledge, and a pre-existing heart condition was not disclosed.
The Ombudsman examined the CCTV footage from the bank branch and confirmed that the borrower had spent only 12 minutes at the loan desk, during which both the home loan documentation and insurance proposal were completed. The Ombudsman held that the bank staff had clearly filled the forms on behalf of the borrower, which constituted a procedural lapse by the distribution channel. The insurer was directed to pay the full claim of ₹38 lakh (the sum assured applicable at the date of death as per the decreasing schedule), and the bank was directed to compensate the family ₹1 lakh for the mis-selling process.
Court Case Reference
State Bank of India & SBI Life Insurance vs. Shri Rajendra Prasad Gupta (NCDRC, Original Petition No. 392/2021) — The borrower had taken a ₹55 lakh home loan with a decreasing term plan. The borrower prepaid ₹15 lakh after 3 years, reducing the outstanding to ₹32 lakh. However, the decreasing term schedule was based on the original ₹55 lakh amortization and showed a year-3 sum assured of ₹48 lakh. When the borrower died in year 4, the insurer paid ₹44 lakh (year-4 schedule), of which ₹29 lakh went to the bank (outstanding loan after further EMIs) and ₹15 lakh was paid to the nominee.
The nominee argued that the excess payout (₹15 lakh) should have been higher since the borrower had prepaid the loan. The NCDRC held that the decreasing term plan follows its own predetermined schedule regardless of actual prepayments, and the insurer correctly paid the scheduled amount. However, the Court noted that borrowers who prepay loans should consider requesting a revised insurance schedule or purchasing a separate level term plan for the prepayment amount.
Common Sales Mistakes
Mistakes advisors make with increasing and decreasing term plans: (1) Selling a decreasing term plan as the client's only life insurance — loan protection covers only the loan balance and provides nothing for the family's living expenses, education, or other needs. (2) Not verifying that the decreasing term schedule matches the actual loan amortization — mismatched schedules can result in the insurance payout being less than the outstanding loan at the time of death. (3) For increasing term plans, not explaining that the premium is fixed even though the sum assured increases — clients sometimes expect the premium to start low and increase proportionally. (4) Recommending an increasing term plan to someone who already has a level term plan with adequate margin for inflation, resulting in unnecessary premium expenditure. (5) Allowing bank staff to fill insurance proposal forms on behalf of the borrower during loan processing, which is a compliance violation and a leading cause of claim disputes.
Claims Dispute Example
Harish Menon, aged 42, took a ₹75 lakh home loan from a private bank in Kerala. The bank sold him a decreasing term plan from Bajaj Allianz Life with a single premium of ₹56,000. Three years later, Harish took a top-up loan of ₹15 lakh from the same bank, but no additional insurance was arranged for the top-up.
Harish died in the 5th year of the original loan. At that point, the total outstanding loan (original + top-up) was ₹78 lakh. However, the decreasing term plan's sum assured in year 5 was only ₹62 lakh (based on the original ₹75 lakh loan amortization). Bajaj Allianz paid ₹62 lakh to the bank, leaving the family with an uncovered loan balance of ₹16 lakh.
The family filed a complaint with the Ombudsman alleging that the bank should have arranged additional cover for the top-up loan. The Ombudsman ruled that the insurer had fulfilled its obligation under the policy terms (paying the scheduled SA for year 5). The shortfall was attributed to the bank's failure to offer insurance for the top-up loan, and the Ombudsman directed the bank to waive the remaining ₹16 lakh loan balance as compensation for the advisory failure.
Learning for POSP / Advisor
For POSP advisors, increasing and decreasing term plans fill specific niches in a comprehensive financial plan. Key advisory points: (1) Always recommend a decreasing term plan alongside any long-term loan (home loan, business loan) — it is the cheapest way to ensure the loan does not burden the family in case of the borrower's death. (2) For inflation protection, suggest an increasing term plan or a level term plan with a higher initial sum assured (e.g., ₹2 crore instead of ₹1 crore to account for future inflation). (3) Educate clients that bank-sold loan protection plans can be purchased from any insurer, not just the bank's partner insurer — comparison shopping often yields 15–25% savings. (4) For clients with multiple loans (home, car, personal), a single level term plan with adequate coverage may be simpler and cheaper than multiple decreasing term plans. (5) Always review the decreasing schedule in the policy document to ensure it matches the actual loan amortization.
Summary Notes
• Increasing term plans grow the sum assured over time (typically 5–10% per annum) to counter inflation and rising family expenses.
• Decreasing term plans reduce the sum assured over time, matching the outstanding balance of a loan — ideal for home loan, car loan, and business loan protection.
• Decreasing term plans are the cheapest form of term insurance because the average sum at risk is significantly lower than a level term plan.
• Banks cannot mandate the purchase of loan protection insurance from a specific insurer — borrowers have the right to choose.
• The decreasing term schedule must match the actual loan amortization; mismatches can leave the family with an uncovered loan balance.
• Top-up loans and prepayments can create discrepancies between the decreasing term schedule and the actual loan balance.
• Increasing term plans have higher premiums (40–70% more than level term plans) but the premium remains fixed throughout the term.
• A level term plan with a sufficiently high initial sum assured can serve as an alternative to an increasing term plan.
• Decreasing term plans should supplement, never replace, individual term insurance for overall family protection.
• IRDAI caps the maximum annual increase in increasing term plans at 15% simple or 10% compound.
Case Study Questions
Q1.Priya, age 32, earns ₹20 lakh/year and has a ₹60 lakh home loan with 25-year tenure. She already has a ₹1 crore level term plan. Her bank is pushing a ₹60 lakh decreasing term plan at a single premium of ₹48,000. Should Priya buy the decreasing term plan in addition to her existing coverage? Analyze the pros and cons and recommend whether the separate loan protection adds value or if her existing level term plan is sufficient.
Q2.Two advisors are debating: Advisor A recommends a ₹2 crore level term plan for a 28-year-old client to handle future inflation. Advisor B recommends a ₹1 crore increasing term plan (10% annual increase) for the same client. Compare the total premiums, death benefit in years 10, 20, and 30, and advise which approach offers better value for money.