Types of Term Insurance How Does Term Plans Work?

How Term Insurance Helps to Secure Future

If you have kept your eyes and ears open in the last couple of years or so, there is a pretty good chance that you would have heard of term insurance. They are usually attributed to the lower insurance premium, whereas in reality there is much more to term plans than what meets the eye. In simple terms, it is an insurance type that provides life coverage for the insured for a certain period of time.

One of the most striking features of term insurance is that the insurance company pays out the sum assured only in the case of the death of the insured. This means that if the insured survives the duration of the policy, there are no payouts. Unlike the endowment plans, there are no maturity benefits when it comes to term insurance plans. The following are the few types of term insurances that you can opt to purchase.

Types of Term Insurances

Level Term

You can think of this as the default setting for term insurance plans. The premium amount and sum assured remains constant all through the term of the policy. This is one of the most common term plans that people usually opt for and all the insurance companies offer this plan.

Decreasing Term

The life cover of a decreasing term plan reduces over a period of time at a predefined rate while the premium remains the same. These plans are annual renewable plans. Some might argue this defies the very point of taking term insurance, but it has its benefits. As you grow old, your liabilities such as home loan, car loan, etc. keep reducing or might become null and thus, a lower cover would suffice. You can opt for this type of term insurance to safeguard mortgage or other types of loans. It is also more economical when compared to other term insurances.

Increasing Term

An increasing term insurance plan is in stark contrast with a decreasing term plan. The name is descriptive enough and suggests that the coverage increases over a period of time. This comes in handy as it can get a little difficult to anticipate inflation and choose the sum assured accordingly upfront. Thus, you can start with a decent enough coverage and increase the same as time passes. The premium of increasing term insurance is a bit on the higher side.

Return of Premium

Money back term plans is the latest addition to the types of term insurances. It addresses the concerns of people who think term insurance is just not worth their money as they do not get any returns if they survive through the policy term. If you opt for this type of term plan, the insurance company would refund the entire amount that you paid as the premium over the course of the policy.

Term Vs Endowment

If you have had an encounter with an insurance agent, you most probably know what an endowment plan is. If not well, in a nutshell, it is an insurance product that provides you with life insurance cover and sum assured on completion of the term, unlike term insurance. Endowment plans are a combination of insurance + investment and that is the reason why they are expensive.

For example, a person in his/her 30s looking for a life cover of Rs. 1 Crore would have to shell out about Rs. 9000 per year. A similar cover in the endowment plan would cost the person about Rs. 1 Lakh annually. A Certain portion of your premium is dedicated to savings and investments, which increase the cost of endowment plans drastically.

Death Benefit

Even though term insurances have evolved with time and now offer a total return of premium options, at the core they remain death benefit centric. In the unfortunate event of the demise of an insured, the nominees stand to receive the sum assured as per the policy documents. The sum assured on death might be either of the following.

If you opt for single pay policies, the death benefit is usually calculated highest of the following.

  • 125% of the single premium amount paid
  • Sum assured on Maturity
  • Absolute amount in case of death

If you choose regular payment options, highest among the following qualify for the death benefits.

  • 10x annual premium paid by you
  • 105% of all premiums paid
  • Sum assured on Maturity
  • Absolute amount in case of death

Depending on the plan and insurance company you can choose the payment as one time or regular income option.

Term insurance is a great way to keep your midterm and long term financial obligations at bay and ensuring your family is not troubled by financial constraints in your absence. Because the focus of term plans is very limited, you end up getting pretty high life cover at very affordable prices.

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