If you have been trying to buy a term insurance plan lately, it is quite possible you’ve come across many types which offer different types of death claim benefits and are not sure which one is right for you. If that is indeed the case, this article will help you pick the right one from the several types of term insurance plans available in India today.
Like ice-creams, term plans have gone beyond just the plain vanilla version. In the last year or so, insurance companies in India have launched a plethora of term plans to address niche customer needs. While we are still big fans of the plain vanilla term insurance plans, you may still find a variant that fits your protection needs better, so it’s a good idea to find out if it does.
Let us now understand the types of term insurance plans. Broadly, based on the timing and size of death claim payouts, there are 2 types of term insurance plans.
1. Lump-sum claim payout – the entire claim amount is paid to the nominee in one shot.
2. Installment-based claim payout – the entire claim amount is paid as income, i.e. split into monthly/yearly installments and paid for a fixed period of time.
And of course, there are variants based on combinations of these types.
As is obvious from its name, a lump-sum claim payout term insurance plan provides the nominee with a lump-sum, i.e. a one-time complete payout. The policy closes immediately after the payment is done. This is the simplest among all types of term insurance plans and also the most popular.
Where do Lump-sum Claim Payout Term Insurance Plan score well?
- It is very simple to understand and easy to compare vis-a-vis other such plans. Among all types of term insurance plans, every insurance company has at least this variant available.
- It is very well suited to cover loss of income on death of the earning member. It can provide a large sum of money, which can be used partially to settle any outstanding loans/debt or other liabilities and the rest of the amount can be invested to give returns over time. These returns can be used to take care of living expenses for the family members including education, marriage and other expenses for children till they become independent, retirement and medical expenses, etc.
- Among all types of term insurance plans, lump-sum payout term insurance works best when you want to specifically cover a home loan (or any other loan). If you are going in for a home loan, or already have one which is not covered with an insurance, get yourselves covered a lump-sum payout term plan in the way illustrated below.
Loan tenor = 20 years, so balance years left = 14 years.
Home Loan principal outstanding as of today = Rs. 55 lakhs, EMIs to be paid for balance 14 years.
Buy a Lump-sum Claim Payout Term Insurance Plan as follows:
- Policy Sum Assured = Rs. 55 lakhs
- EMI to be paid = for 16 more years, so risk of death to be covered for 16 years. Therefore, Policy Term = 16 years.
- In case of a joint loan, ensure that the nominee (and also the legal owner of the property) is the co-borrower.
- Continue this policy till all EMIs are paid off in 16 years. In case of death during this period, nominee gets Rs. 55 lakhs which can be used to settle the outstanding amount and get full possession of the home.
- In case the loan is paid off earlier (most loans are paid off in less than 60% of the tenor), just stop paying premium for this policy and the policy stops. Simple.
While most lump-sum payout plans have a fixed Sum Assured benefit, some may offer higher or lower benefit depending on the time of death.
What you need to be careful about
- With due respect to your nominee, not every spouse/child is financially literate especially when it comes to managing money. Imagine the situation if your nominee were to invest the entire amount in the share market or chit funds based on some friend/relative’s advice, and then lose all the money. Remember the money is meant to take care of the whole family’s expenses for the next 30-40 years! What if it gets eroded or wiped out? Surely you don’t want a situation like that. So keep your nominee informed of the term plan and also advise what to do with it in case the situation does arise.
- Beware of fraudsters. When your nominee gets huge amounts from the insurance company, there could be some known/unknown people contacting them to offer ‘friendly tips and advice’ on what to do with the money. Some of these tips can include giving the money to them so that they can invest it for your nominee’s benefit. That’s the last thing they should do, however close the person is. Ensure that your nominee is told (1) never to convert the claim amount into cash and (2) never to pass on the title of the money to someone else. Else, that could become an one-way transaction!
- Another important reason is temptation – the desire to overspend. When a person has too much money in hand to handle, one may spend unnecessarily on things that may not be affordable in the long run, therefore eroding the claim amount corpus and getting into financial hardships later. In such cases, the second type of term insurance plan is far better suited.
So when you are choosing among the types of term insurance plans, if you are confident that your nominee can handle the above points well, and your needs match the benefits, go ahead with a lump-sum term insurance plan.
In such a term insurance plan, in the event of death, the claim amount is divided in equal installments and paid over a fixed period of time. e.g. if the Sum Assured was Rs. 60 lakhs, it could be paid @ Rs. 50,000 per month over 10 years, i.e. Rs. 50,000 x 12 x 10 = Rs. 60,00,000. The policy closes after the last installment is paid. As simple as that.
Installments may be taken monthly, quarterly, half-yearly or annually depending on what the company offers you.
Benefits of Installment-based (or Income-based) Claim Payout Term Insurance Plans
- At first glance, this may not sound good as it is always better to get the money early than over a period of time. But keeping the time value of money in mind, insurance companies charge lesser premium for such a plan compared to the lump-sum payout term insurance plan, for a specific Sum Assured.
- Money paid like an income, i.e. in installments is easy to handle, unlike lump-sum payout plans.
- In a sense, it is the best replacement for income contributed by you. So when you buy this plan, try to get the installment as close to your real monthly contribution (income after taxes). This way, your income is replaced and your family will feel the least financial pinch of your absence.
- It is easy for the family to systematically continue to invest a portion of this income for their long term needs. If you have already begun building a corpus for specific long-term expenses like your child’s education, marriage, retirement, etc., then a small portion of the installment received after you are gone can continue to be contributed to the fund you were already nourishing for future needs.
What you need to be careful about
- Among the types of term insurance plans, installment type claim payout option cannot help you settle an outstanding loan since the installments are small and the outstanding amount can be really big.
- This type also cannot take care of inflationary impact on expenses.
Whatever types of term insurance plans you come across, ensure that you choose wisely and only as per your needs. And among other things, don’t forget to check the claims settlement ratio of the insurance company you finally choose and read these tips before you fill up your term insurance application form.
3 thoughts on “Types of Term Insurance Plans – How to choose right”
very nice explanation. really good website for term insurance.
Rajesh, NPV is relevant only for term plans with installment based payouts. it is nothing but the current (at the time of death) value of all the installments that you will get in the future. To get this value, a discounting factor (generally 6-7%) is applied. So Rs. 106 after 1 year is worth Rs.100 today. This is worked out for each installment and they are all added together to get the current value.
NPV is the best way to compare all installment-based payouts especially when they are of different values and are given at different times or for different periods.
I have been hunting high and low for this explanation. thanks very much. i was going through the policy bazar website recently but i was not ableto make up my mind because i found the comparison confusing. there is something mentioned about net present value there. please clarify its meaning. thanks in advance.