So you are ready to buy Term Plans but are now confused which one to buy? Don’t worry – this is a good confusion to have. That is because it is better than many who just go and buy the wrong type of term plans simply because his/her friend also bought the same.
Remember one thing – you and your closest friend may be very similar in your age, your lifestyle and even your thinking but it is very likely that your insurance needs are very different. So find out which is the term insurance plan that you need before going ahead and buying one.
There are several types of term plans available in India and they are offered by most life insurance companies. They are classified based on
(a) benefit, and
(b) premium payment frequency
All term insurance plans offer a monetary benefit to the nominee only, and only upon your death. Being a pure risk cover plan, there is no other benefit.
Benefit-based Term Plans
1. Level Benefit Term Plans : Fixed Life Cover for a Fixed Term at a Fixed Cost
Also called level term plans, this is the most common of term plans bought in India. Simple product – the life cover is fixed, the tenor (period of cover) is fixed, and there is a fixed premium that you have to pay till the end of the term.
e.g. For a 30-yr old non-smoker male buyer can get a Level Term Insurance Plan for a Sum Assured (Life Cover) of Rs. 50 lakhs for a period of 30 years, for a premium of Rs. 5,000 (rough estimated cost) per year. If he dies anytime within this period, his nominee will receive Rs. 50 lakhs.
If premium is discontinued, life insurance stops and the policy lapses.
2. Decreasing Benefit Term Plans : Reducing Life Cover for a Fixed Term at a Fixed Cost
An excellent plan if you
- want to exclusively cover a home loan for which you are paying EMIs, or
- want to exclusively cover any other debt which is reducing over time, or
- are in your 50s and want to cover income which will reduce over time especially after you retire
These term plans work very well in the above cases, since the need of the cover (e.g. outstanding principal in a home loan) reduces over time. So rather than having a fixed cover and paying premium unnecessarily, take reducing cover term plans so that it is cost-efficient given the objective that you have.
e.g. if you have taken a home loan for Rs. 70 lakhs, go for a decreasing term insurance plan which starts with Rs. 70 lakhs insurance cover but gradually reduces by say 5% every year. It is important to note here that for such loans, the outstanding principal comes down very gradually in the first few years and but faster in the last few years. When you buy the decreasing term plan, make sure that you have accounted for this variability. Or simply go for a term insurance attached to your home loan.
The premium for this type of plan is always lower than that for level term plans for the same starting Sum Assured.
3. Increasing Benefit Term Plans : Increasing Life Cover for a Fixed Term at a Fixed Cost
Exactly the opposite of Decreasing Term Insurance. In these term plans, the Sum Assured, i.e. Life Cover, keep increasing with time. These term plans should be chosen if you are starting term insurance at a young age, say < 35 years. So as you income increases, as your responsibilities go up (marriage, children, etc.) you start getting more and more protection. This plan works really well since there is no need to buy another term plan over time which is good because term plans become more expensive as age increases.
e.g. if you are 25 years old, and your annual income is Rs. 6 lakhs, take an increasing term insurance plan with Rs. 50 lakhs of life cover to start with. This will go up by say 5% every year for the next 30 years. At 55, your protection cover will be healthy at Rs. 2.16 crores.
The premium for these type of term plans is always higher than that for level benefit term plans for the same starting Sum Assured.
4. Level Benefit Term Plans with Return of Premium (RoP): Fixed Life Cover for a Fixed Term at a Fixed Cost, All Premiums returned at the end of the term on survival.
Same as Level Term Insurance Plan but where all the premiums paid for the whole period are returned (without any interest, etc.) in case you are alive at the end of the period.
e.g. Buy a level term insurance plan with Return of Premium with sum assured of Rs. 1 crore for 30 years, for annual premium Rs. 24,000. If you were to die within 30 years, the nominee is paid Rs. 1 crore. But if you survive, you will get back Rs. 24,000 x 30 = Rs. 7,20,000, after reducing service tax, cess etc.
This may sound like a ‘free life cover’ plan since all the premiums come back at the end of the period. But please note that
- the premium will be much higher than level benefit term plans, and
- once you start this plan, you cannot quit since you will definitely have to pay all premiums in case you want them back by the end of the term on survival. If you buy a level benefit term plan, you can change your insurance company at any time if there is significantly difference in value offered – be it in terms of lower premium, or better claims settlement ratio, or service.
I would not recommend this type of term plan, and you’ll know why when you read this.
Premium Payment-based Term Plans
Regular Premium term plans : Pay premium every year or every half-year or every month.
Single Premium term plans : Only one big premium is paid.
Whether to opt for Regular Premium or for Single Premium is your own decision. But I can offer you some cues to make that decision.
- Regular premium option is generally preferred because it has lower premiums and it gives flexibility to switch.
- Regular Premium offer you the option to add riders such as Accident Benefit Rider, Disability Benefit Rider, Waiver of Premium Benefit Rider and Critical Illness Benefit Rider. Most Single Premiums plans do not allow riders.
- If you are salaried, Regular is preferable since it dovetails well with your income flow.
- If you are an investor who knows how to manage good returns, Regular Premium is better because you can get much better returns from the money that you would have otherwise invested in a Single Premium plan.
The best way to purchase term plans is to compare and buy it online – it is very cheap, and the process is very easy.