Term insurance is the most affordable and simplest forms of life insurance policies. Before availing a cover, it is vital for the applicant to understand the various types of term insurance plans available, so that he/she makes an informed decision about the policy purchase.
Thinking about getting a term insurance cover? Well, you need to give some serious thought into the kind of plan you’re availing since the financial future of your loved ones is in question. Term insurance is designed to provide financial protection for a fixed period of time. In the event you - the life assured - pass away during the policy term, the insurance company will pay out the death benefits to the nominees you’ve listed in the policy. Term insurance has a number of benefits to offer, and hence, must be part of everybody’s insurance portfolio.
Term insurance can be broadly classified into four main types:
Level Term Insurance: Level term insurance is the most commonly availed plan in India. The sum assured and premiums that are payable remain fixed for the entire tenure of the policy. So, whatever premiums that you and the insurance company agree upon when you buy the plan, will stay constant for the next 10 years or 20 years (depending on the policy period you have selected). The younger you are when you buy a level term life insurance plan, the cheaper you will find the premiums to be. This type of cover is provided by all life insurance companies.
Increasing Term insurance: An increasing term insurance plan is one where the death benefits increase periodically, mostly every year, during the policy's term. The policy’s premiums do not increase. Some plans have a limit on the maximum that a sum assured can reach. However, while the increase in coverage amount will stop on touching the limit, the plan will still be effective. Such plans are designed to help combat the effects of inflation and/or changing circumstances. The cost of increasing term insurance plans is normally higher than that of level term plans.
Decreasing Term Insurance: Here, the sum assured payable decreases every year until either the policy pays out or the coverage period comes to an end. Premiums payable in case of decreasing term insurance remain constant. Such policies are normally availed to cover against a specific debt, which itself reduces in size over time. Usually, the sum assured comes down to zero when the policy period comes to an end. Premiums of decreasing term insurance plans are lower when compared with other types of term insurance.
Term Insurance with Return of Premium (TROP): If you opt for a return of premium term plan, the insurance company will return all the premiums that you've paid over the life of the policy at the end of the term. However, this shall only apply if you survive the policy period. For example - Mr. X avails a TROP with a sum assured of Rs. 50 lakhs for 20 years. The annual premiums that he is required to pay is Rs. 5,000. In the event that Mr. X passes away during these 20 years, his beneficiaries will receive the sum assured amount of Rs. 50 lakhs. However, should he outlive the policy period, the insurance company will return all his premiums i.e. Rs. 1 lakh (Rs. 5,000 x 20).
Finding the Right Plan: Once you know what type of term insurance will suit your needs, shortlist those insurance companies in the market that provide that particular cover. Make sure to take into consideration a company’s claim settlement ratio, reputation and reviews provided by other customers. When you’re considering the policies of different firms, study their features, benefits and costs as they will vary from one another. Choose a policy that meets all your insurance requirements, and at the same time, fits your budget.
Point to consider while buying term insurance
Here are a few factors that individuals must consider to avail the right term insurance plan:
Selecting the insurance provider: Individuals are advised to opt for policies from those insurance companies that hold high credibility. The first way to identify this is by considering the claim settlement ratio. Beyond this, the elements that applicants are advised to factor in include - solvency ratio, corporate governance record, assets under management and instances of violations (of IRDAI norms).
Attach riders with your Term Insurance Plan only if necessary: One can find a number of riders available in the market. Some of them include - accidental death rider, permanent and partial disability and critical illness rider. They provide extra protection for an additional premium. It is advisable to only avail riders if the policyholder deems it necessary. Say, for instance, if the individual travels often for work, then having an accidental death rider is a wise choice. On the other hand, if the occupation requires heavy physical work, then a permanent and partial disability rider would be the perfect fit.
Know the right level of coverage: Buying a term insurance policy is a smart move as it helps ensure financial coverage for the life assured's loved ones at affordable rates. The level of cover one needs will depend on the individual's personal and financial circumstances. Most people are advised to take insurance cover that is 10 to 15 times their income. However, experts recommend that it must be 15 to 20 times their income as this amount would be enough to replace the policyholder's income as well as cover the expenses of the dependents.
Disclose details of any existing policies: It is very important for an individual to disclose all details pertaining to any current insurance policies, before availing a new term insurance plan. The applicant must communicate the name of the insurance company, sum assured and policy number to the new provider. It has been observed that quite often people refrain from mentioning this information in the proposal form, simply because they find it time-consuming to go through their old documents to retrieve the information. However, there have been instances where hiding such important details have resulted in claim rejection by the new insurance provider.
Policy duration: The main purpose of availing a term insurance plan is to ensure an individual’s loved ones are financially protected in the event the individual is no more. A number of factors come into play when determining the policy term - age, when the individual plans to retire and financial responsibilities. It is best to avail a term cover at a young age as the individual will benefit from low premiums for a long-term cover. The entry age plays a big role in deciding the premiums that are payable. Also, it is necessary to factor in when the individual sees himself or herself accomplishing life’s major financial goals - child’s education, marriage, etc.
Single premium or regular premium policy: While single-premium policies can seem like the convenient option, it can be heavy on the pocket unless the individual has idle money lying around. From a tax standpoint, regular premiums give the policyholder a better edge. Tax benefits under Section 80C of the Income Tax Act, 1961, can be claimed for both the modes of premium payments. However, it is essential to note that the benefits can only be claimed in the year when the premium payment is made. Therefore, in case of single premium policies, the policyholder can claim tax deduction once - the year when he or she pays the premium. Under a regular pay policy, the policyholder will be able to claim tax deduction every year - throughout the premium paying term.
How Riders Can Boost Term Insurance Protection
The benefits of a term insurance cover are plenty. Besides providing high coverage at low cost, a term insurance plan comes with several riders. Here is a look at the different riders you can include with your term plan for increased protection:
Critical Illness Rider: The critical illness rider pays a lump sum amount if you are diagnosed with a serious ailment, which is listed in the policy. Some examples of covered critical illness include kidney failure, heart attack, stroke, cancer, heart valve surgery and paralysis, among others. Sometimes, the policy coverage reduces by the amount that is paid to you. So, make sure to read the policy documents carefully to know what exactly will take place under this rider.
Accidental Death Rider: This term rider provides additional sum assured if the life assured passes away as a result of an accident. The payment from this rider acts as a supplementary sum assured. The insurance company generally pays twice the policy’s face value - thus it can also be called a double indemnity rider. It must be noted that if the cause of the life assured’s demise is due to reasons other than an accident, the beneficiary will only receive the sum assured from the base term insurance plan.
Waiver of Premium Rider: The waiver of premium riders ensures that your policy does not lapse if you're unable to keep up with future premium on account of a critical illness, serious injury, or disablement. The illness or injury should be such that the policyholder is unable to work in a traditional capacity. Here, the future premiums shall be waived off, but your policy will continue to remain active for the entire policy period. Most waiver of premium riders have a waiting period during which no benefits are payable.
Accidental Permanent & Partial Disability: This rider can come to your aid in the event an accident leaves you permanently or partially disabled. Such policies will either make regular payments of a certain percentage of the sum assured for the next 5 to 10 years or pay a lump sum amount to cater to your immediate expenses. It must be noted that claims can only be made if the disability occurs as a result of an accident. Quite often, this rider is combined with accidental death rider.
Term insurance riders are effective tools in providing additional security against the various risks facing one’s life. A policyholder must communicate his or her desire to avail a rider prior to purchasing the base term plan, as some insurance companies only allow rider additions when the cover is purchased.
Make sure to avail those riders that you deem necessary - this can be determined by assessing the various risks that you face. This way, you make an informed decision about the policy that you purchase and you don’t end up shelling out money for plans that you absolutely don't need.