If you are in the market for a life insurance plan, it is quite unlikely that you have not come across the option of term insurance. Whether you are keen on term insurance or still browsing for the right plan, it may be necessary for you to know that the plans aren’t all the same when it comes to features and benefits.
If you were to dive slightly deeper, you would notice there are various types of term insurance plans.
Let’s dive into the basics of term insurance and understand the various types of term insurance policies available in the market, so you may choose the one that suits you best.
Basics of Term Insurance
Term life insurance plans are a form of life cover providing coverage for a specific period, as may be evident from the use of the phrase “term”.
- If the policyholder passes away during the policy term, their beneficiaries receive a death benefit.
- Unlike other life insurance policies, the basic form of term insurance does not offer a maturity benefit if the policyholder survives the term.
- It is one of the most cost-effective types of life insurance available, making it a popular choice for those looking to ensure financial protection at a lower premium.
Types of Term Insurance
There are several types of term insurance plans, each designed to cater to different financial needs. Here's an overview of the most common options.
1. Level Term Insurance
It is the simplest form of term insurance. The sum assured remains constant throughout the policy term, and the premiums are fixed for the entire duration. This plan is ideal for individuals seeking straightforward coverage.
This plan is best suited for individuals with steady financial needs who want consistent coverage.
2. Increasing Term Insurance
In an increasing term insurance plan, the sum assured increases at regular intervals while the premium may either remain the same or increase marginally. This type of policy is designed to combat inflation and ensure that the death benefit keeps pace with rising living costs.
This plan is best suited for those who want protection against inflation and have long-term financial commitments such as children's education or retirement planning.
3. Decreasing Term Insurance
It offers a coverage amount that reduces over time, typically aligned with a decreasing liability, such as a home loan. As your financial obligations decrease, so does the coverage, which makes the policy more affordable.
Decreasing term insurance is best suited for individuals with large debts, such as a mortgage, who want to ensure that their liabilities are covered without paying for unnecessary coverage later in life.
4. Return of Premium Term Insurance
Also known as TROP, term insurance with a return of premium option is one of the types of term insurance that offers a maturity benefit. With this type of plan, if the policyholder survives the policy term, the insurer returns the premiums paid over the term minus any charges. However, the premiums for these policies tend to be higher than regular term insurance.
This plan is best suited for those who want some maturity return with their policy if they outlive the policy term.
5. Convertible Term Insurance
This flexible life insurance policy allows you to convert your pure-risk term insurance plan into an endowment or whole life policy without a medical examination. It is ideal for young individuals who want affordable coverage now but may want to consider savings-oriented insurance coverage later.
6. Joint Term Insurance
Joint Term Insurance is a single policy that covers two lives (usually spouses). The sum assured is paid upon the first death, which provides immediate financial support to the surviving partner. In some cases, the payout is provided on the demise of both individuals. This is a cost-effective alternative to two individual life insurance policies for securing a family's future.
7. Term Insurance with a Critical Illness Rider
While a rider and not a standalone type, Term Insurance with Critical Illness Rider is a crucial variant. It pays a lump sum upon diagnosis of a specific critical illness, in addition to the life cover.
Here’s a quick comparison of the different types of term insurance.
Type of Term Insurance
| Sum Assured
| Premium
| Best Suited For
|
Level Term Insurance
| Constant
| Fixed
| Individuals with steady financial needs
|
Increasing Term Insurance
| Increases
| May increase
| Protection against inflation
|
Decreasing Term Insurance
| Decreases
| Lower
| People with reducing liabilities (e.g., home loan)
|
Return of Premium
| Constant
| Higher
| Risk-averse individuals seeking premium refund
|
Convertible Term Insurance
| Constant
| Fixed
| Young individuals wanting future flexibility to switch to a savings plan
|
Joint Term Insurance
| Constant
| Lower than two separate policies
| Married couples seeking cost-effective, combined coverage
|
Term with Critical Illness Rider
| Lump sum paid on critical illness diagnosis
| Higher than base plan
| Those seeking comprehensive protection against health and mortality risks
|
Using a term insurance calculator can help you get a clear idea of the costs involved in opting for these riders.
Benefits of Term Insurance
Known for its simplicity and affordability, term insurance also offers several specific advantages. Here are some term insurance benefits to consider.
Affordability
Term insurance premiums are generally lower than those of other life insurance policies, making the various types of these plans rather accessible to a wider demographic.
Flexibility
The coverage duration of term plans can be selected by the policyholder. You can choose the policy term based on your financial needs and available options, whether it is 10, 20, or even 30 years.
Customisation
Riders, such as accidental death benefits or critical illness cover, allow for customisation to your policy based on your needs and budget. Check for available rider options when buying the policy.
Choosing the Right Term Plan
Here are some key factors to consider when selecting the right term insurance plan for your needs.
Evaluate Financial Goals
Determine your long-term financial commitments, such as children's education, a home loan, or retirement planning. This will help you select from the available options. For example, an increasing term insurance plan is likely a better choice for people who are looking to support the higher education of their kids or offer financial support to their spouse in their later years. However, if you are buying this loan to cover a liability, you may find that a decreasing term insurance plan is a more suitable option.
Consider Inflation
If your life cover needs are rather long-term, opt for a policy that either offers an increasing cover or allows for incremental increases in coverage. Increasing term insurance can help protect your loved ones from the eroding effect of inflation.
Policy Duration
The right policy duration depends mainly on the purpose of buying this policy. If this is a primary life cover that you expect will support your family in their times of need, a longer duration may be suitable. However, if you expect your dependents to take care of themselves in a few years, a shorter duration should be more effective.
Use a Term Insurance Calculator
Before purchasing a plan, it is advisable to estimate the required coverage using a term insurance calculator. These calculators consider factors such as age, income, liabilities, and existing savings to suggest the appropriate sum assured and premium amount.
Affordability
Consider a plan fitting within your budget without compromising on essential coverage. Term insurance calculators can assist in determining the premium you’re likely to pay for different types of policies.
Choosing the Sum Assured Value
Selecting the right sum assured is critical. It should be sufficient to replace your income for your dependents and cover all outstanding liabilities. A common rule is to opt for a cover that is at least 10-15 times your annual income.
For comprehensive protection, consider a ₹1 crore term insurance plan or higher. Using a term insurance calculator is the best way to determine an accurate and adequate sum assured based on your unique financial situation.
Getting insurance, especially buying life insurance plans, is one of the most important financial decisions you may take in your life. You may be paying the premium amount out of your pocket, but the security offered is meant to ensure your loved ones don’t have to suffer.
Of the options available, term insurance is a cost-effective choice that can be chosen by virtually everyone who seeks coverage. Knowing the types of term insurance is important in making an informed choice. You can easily browse the life insurance provider’s website or get in touch with a customer service representative to learn more about them.
FAQs
1. Can I extend my term plan if I need coverage for longer?
Yes, certain types of term life insurance plans offer a renewability feature. A renewable term plan allows you to extend your coverage after the initial term ends, without needing a medical check-up. This is ideal if your health changes or if you need to maintain financial security for your family beyond the original period.
2. Are all term plan payouts the same, or do I have options?
The standard payout for most types of term life insurance is a single, lump-sum amount paid to your nominees. However, some insurers offer alternative payout options. These can include a monthly income stream for a certain period or a combination of a partial lump sum followed by regular income. You have flexibility in how your family receives financial support.
3. Is suicide covered under a term insurance policy?
Most term insurance plans have a specific clause regarding suicide. In most cases, if the policyholder dies by suicide within the first 12 months of the policy commencement or revival, the claim is not paid. Instead, the insurer may refund a certain percentage of the premiums paid. After this initial period, the full sum assured may be paid to the nominees.
4. Do all term plans provide the same tax benefits?
The core tax benefits under Sections 80C and 10(10D) of the Income Tax Act are standard across all types of term insurance that meet the specified criteria (like the 10% premium-to-sum-assured ratio). This means premiums are deductible, and the death benefit is tax-free. However, for a Return of Premium (TROP) plan, the maturity benefit is also tax-free. This is a distinct advantage not offered by standard life insurance plans.
5. What kinds of death are not covered in a term plan?
A term plan is designed to cover most causes of death. Standard exclusions are usually limited. These often include:
- Death due to suicide within the first year (as mentioned above)
- Death resulting from engagement in illegal activities
- Death due to a pre-existing condition that was not disclosed at the time of application.
Disclaimers:
Disclaimers: IndiaFirst Life Insurance Company Limited, IRDAI Regn No.143, CIN: U66010MH2008PLC183679, Address: 12th & 13th floor, North Tower, Building 4, Nesco IT Park, Nesco Centre, Western Express Highway, Goregaon (East), Mumbai – 400 063. Toll free No – 18002098700. Email id: customer.first@indiafirstlife.com, Website: www.indiafirstlife.com. Fax No.: +912268570600. IndiaFirst Life Insurance Company Limited is only the name of the Life Insurance Company and ________________ UIN ____________ is only the name of the Life Insurance Product and does not in any way indicate the quality of the contract, its future prospects, or returns. For more details on risk factors and terms and conditions, please read the sales brochure carefully before concluding the sale. Trade logo displayed above belongs to our promoter M/s Bank of Baroda and is used by IndiaFirst Life Insurance Co. Ltd under License. Advt.
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