Insurance can sometimes be complicated. However, term life insurance is one type of insurance that is very simple. Term life insurance is an insurance policy that provides you with a life cover for the premium paid. As long as you keep paying the policy premiums, the life cover will continue. Usually, a lump sum is paid out when the policyholder passes away. There are no maturity benefits.
Within the category of term life plans, there are different types of plans based on the cover provided, the lump sum paid out and whether you will get your premium back at the end of the policy term. Read on:
Stable Term Insurance
This is a policy that most insurance companies in India sell. This term plan will offer a fixed cover for the policy term based on the premium paid. The cover will not change based on your family needs or liabilities.
Reducing Term Insurance
If you buy this policy, the premium that you pay will remain constant throughout the term of the policy but the cover will reduce at a pre-decided rate. The concept behind this policy is that as the policyholder ages, their liabilities reduce. So, the policyholder might need lesser cover later in his/her life.
For example, let’s say you buy a term life cover for Rs 50 lakh for 10 years. The insurer says that the cover will decrease by 5% each year. After 5 years, you will have a cover of Rs 25 lakh instead of Rs 50 lakh. This type of term insurance is purchased only for protecting loans or liabilities that a policyholder might have. Those with a huge amount of loans purchase this policy. The premium for a decreasing term policy is usually much lower than that of a stable term policy.
SBI Life Poorna Suraksha, for instance, reduces your life cover as you grow older but increases its critical illness cover, accounting for the fact that illnesses are more common as people grow older.
Increasing Term Insurance
This is the reverse of the decreasing term plan. In an increasing term plan, the life cover will increase as the policyholder gets older. The premium will remain constant just like the decreasing term plan.
The concept behind increasing term life plan is that inflation reduces the value of money through the years. So, the cover has to increase in line with inflation. Insurance companies will provide a pre-determined rate at which the cover will increase. For example, let’s suppose you get an increasing term life plan for Rs 50 lakh and the cover will go up by 5% every year. If it is a 20-year plan, the cover will be Rs 75 lakh after 10 years.
The premium for this policy is usually much higher than other term plans. Also, very less number of riders might be offered for this plan.
Monthly Income Plan
Under this term plan, you can choose to get a monthly income paid out instead of a lump sum when the policyholder passes away. The income is paid out for a fixed term such as 10 years or until the nominee reaches a certain age. In some cases, policyholders can choose between fixed monthly income and increasing monthly income. Term Insurance policies such as LIC Cancer Cover, ICICI Pru iProtect Smart offer a monthly income or lump sum option.
There are plans where your family can get both lump sum as well as monthly income. A part of the cover will be paid out as lump sum while the other part will be provided as monthly income. This facility is available under ICICI Pru iProtect Smart.
Return of Premium Plan
As you know term plans do not provide benefits on maturity. However, the return of premium plans gives survival benefits. If you survive at the end of the policy term, all the premiums that you paid will be returned to you. The premium for this policy will be higher than the regular term plan.
It is best to choose a policy based on your family’s needs, your liabilities and the number of dependents that you might have. Want to know more about term insurance? Read this post – All About Term Insurance.