LIFE INSURANCE BASICS

Types of Term Plans?

Before you sign the dotted line and write a cheque to buy a term plan for yourself, it’s important to understand the various types of term insurance policies that are available, so that you buy the one that suits your needs.

Here are some types of term insurance plans you may choose from:

1. Level Term Insurance: This is the most common type of term insurance that is bought in India. When you buy this plan, the life cover and the premiums that you choose based on your needs and liabilities remains constant for the entire tenure of the policy. This type of cover is provided invariably by all life insurance companies.

2. Decreasing Term Insurance: This is a type of term insurance which provides a cover that decreases at a predetermined rate over the period of the policy while the premium remains constant. The core idea behind decreasing term insurance is that a person's needs for high levels of insurance decreases with age as his liabilities (like home or car loan) decrease or no longer exist.

For instance, if you buy insurance cover for Rs.50 lakhs for 20 years, the cover may decrease by 5% each year. This way, after 10 years, you would be left with cover of Rs.25 lakhs instead of Rs.50 lakhs that you started with. Decreasing term plans are generally used for mortgage or loan protection. Another advantage of buying such a plan is that its premium is cheaper when compared to normal term insurance.

3. Increasing Term Insurance: As the name suggests, this plan works opposite to the “decreasing term insurance” that we discussed above. Here, the cover amount increases as a person advances in age while the premium remains constant.

The concept of "Increasing Term Insurance” is based on the rising inflation. There is a danger that the insurance cover might not be sufficient, in other words you may be underinsured. To take care of this concern insurance companies offer a term plan where the insurance cover rises at a predetermined rate. For instance, at inception the cover would be Rs.50 lakhs and the cover amount increases by 5% for each year. So, after 10 years the cover would be Rs.75 lakhs.  

Tenure of this type of insurance may not be as liberal as the level term insurance and normally is 20 years. Further; there may be restricted riders that would be available. The premium would normally be higher than other two types of insurance discussed above.

4. Return of Premium Term Insurance: While this type of term insurance is new to the market, there are many takers for the same. As the name suggests, if you buy this type of term policy, the insurance company will return the premium paid over the life of the policy at the end of the term, in case you survive. For instance, if you pay Rs.10,000 p.a. (exclusive of service tax) for 25 years for a cover of Rs.50 lakhs, the insurance company would repay to you Rs.2.5 lakhs at the end of 25 years (in case you survive the period). This policy addressed concerns of people who think term plans are a waste of money. However, one negative side of such policies is that their premiums are a tad higher than normal term plans.

Now, that you have understood the various types of term insurance, you can discuss with your advisor and proceed to buy the type of insurance that is suitable to your needs. You would not be fooled into buying a cover that is not required by you. But consider buying term insurance immediately as it is the most economical way to secure your family’s future.