Term insurance plans are widely regarded as the purest form of life insurance, providing the family of the policyholder with comprehensive financial protection in case the policyholder passes away during the tenure. Considering the affordability factor, most individuals who have just started earning prefer to buy it early on in their career due to the low-cost factor and better coverage. Furthermore, there is no one-size-fits-all solution when it comes to term insurance. So, you may be wondering which type of term plan to choose. To help you understand this, let us go over the various types of term insurance policies in depth so that you may select the best one.
Level Term Insurance Plans: This is a basic term insurance in which the policyholder pays fixed insurance premiums throughout the policy’s term. It is also known as a level premium term plan, and the policy provisions provide the family with a fixed death benefit. The tenure of this plan usually lasts for 10 to 30 years but can be as short as 5 years, depending on the policyholder’s needs. However, their premium rates will vary according to the terms of the insurance. For example, a 5-year level-term plan will be cheaper than a 15-year level-term plan because it provides coverage for a short period, whereas more prolonged policy tenures are more suited for individuals with long-term financial ambitions.
Among the several types of term insurance, level plans are typically the most affordable. As previously stated, they pay a death benefit to the nominee if the policyholder dies unexpectedly while the policy is in effect.
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Increasing Term Insurance: Under this plan, the sum assured chosen by the policyholder increases yearly by a set amount or percentage. This sort of term insurance plan is designed to account for inflation and other unforeseen events. This increment is determined at the time of policy purchase and remains constant throughout the policy’s duration. The increase could be simple or compounded, depending on the percentage increment. However, one should understand that some increasing term plans include a maximum limit on the increase in the sum assured, and these increments end after the maximum limit is reached, even if the policy tenure continues.
Despite the increasing sum assured, premiums under increasing term plans often remain constant throughout the policy period. The insurance company takes the growth in the sum assured into account when calculating premiums, ensuring that premiums are uniform. In general, higher premiums are paid in the early years to compensate for lowered premiums as the sum assured increases with time.
One of the stark differences between the level term plan and increasing term insurance is that the premiums of the latter are higher.
Decreasing Term Insurance: As the name implies, a decreasing term plan reduces the total assured amount by a particular percentage each year. In other words, it is the inverse of an increasing term insurance policy. Although the death benefit is reduced each year, the premiums for this term plan remain the same. The insured has the option of choosing the original sum assured amount, which will reduce each year of the policy’s tenure.
As obvious, the premiums of this type of plan are often lower than for other types of term insurance, and they can even be lower than premiums for term policies with the same sum assured. At maturity, the sum assured is zero, and when the insured dies, the nominee receives the applicable sum assured for that year. A decreasing term plan is only beneficial if the nominee or the insured’s family members are likely to require less financial support as time passes.
Term Insurance with Return of Premium: A term insurance plan with a return of premium (ROP) works in the same manner as a standard term plan. The key distinction between the two is the maturity payment of the TROP. If the insured survives the term plan, S/he will be eligible for a return of premium (ROP). They will get all of the premiums they pay throughout the insurance period. There is a guaranteed payout under the plan.
Furthermore, if the insured person dies during the policy period, their nominee receives a dual benefit payout that includes the death benefit and the ROP payment. The ROP payout is received as a maturity benefit and is tax-free. Like other term plans, the insured selects the sum assured and policy duration and pays the premiums accordingly.
Convertible Term Insurance: This plan allows the insured to convert a term policy into a life or whole policy without having to go through the health certification process again. It is a standard term plan with the additional feature of conversion. In other words, it allows the insured to change a term plan that only covers them for a set number of years into one that protects them for life. This conversion applies as long as the insured continues to pay their insurance premiums.
For example, the insured purchases a 30-year term plan at the age of 40. Given today’s life expectancy, they may outlive their plan, leaving them without life insurance in their last years. With a convertible term plan, they can change their term life insurance policy into a standard life or endowment plan with a maturity benefit equal to the total sum assured. However, it should be noted that certain types of term insurance policies are not readily available in the Indian market.
The premiums for these plans are higher because the maturity benefit is equal to the sum assured amount upon conversion of the term plan. Finally, carrying out the conversion benefit of this plan is recommended at a later point when maturity is approaching.
So we are saying,
A thorough understanding of term insurance and the many types of term insurance plans can assist you in making an informed decision about the best plan for your needs. To choose the best term insurance plan, you need to carefully consider the various types of term insurance plans available in India and evaluate them based on their features.
