All about Term Insurance
Due to the current scenario of Covid-19 pandemic, the risk of untimely death has increased. If the sole bread – winner of the family dies suddenly, it becomes difficult for the family member to cope up with the finances as they lose the main source of income earner. The savings that the family has might not suffice to meet the needs of the family. In this case a term life insurance acts as a savior for the family and them to deal with financial loss if the sole earning member dies.
Let’s understand in detail about Term Insurance
What do you mean by Term Life Insurance?
A term Insurance is a life insurance plan which can be taken on the life of an individual. The policy holder has to decide a specific tenure and the sum assured under this policy. If the policy holder or the life insured dies during the term of the policy, then the sum assured is paid to the deceased’s family by the insurance company. The lumpsum amount received helps the family to deal with the financial loss.
How does Term Plan work?
The person who intends to get insured selects the term of the plan and the amount of coverage. The premium on the term insurance plan is calculated on the basis on the age, coverage amount, health etc. The amount of the premium does vary and remains constant throughout the term of the policy.
There are options available for payment of premium whether at regular intervals or once. The manner of the receipt of the coverage amount can also be decided by the policyholder.
After the purchase of the policy, if the policy holder dies during the term, the beneficiary named under the policy receives the coverage amount.
If the policy holder survives, the coverage ends and usually the policy holder does not receive any payment from the company. However, if the policy has survival benefits then the policy holder may receive a lumpsum on its maturity.
Some companies also have the facility of renewing the term plan. The premium is recalculated in such renewals.
Read also: Is Long term Insurance a Good Option?
Various types of Term Plan Insurance
Term Insurance plans in India are one of the most important, effective and basic plan for an individual. They provide protection to an individual and financial security to the family against unforeseen events. There are several types of term insurance plans available in the industry, let’s discuss them in detail.
1. Level Term Plan
Level term plan is the simplest form of term insurance where the sum assured remains unchanged during the tenure and the nominee of the policyholder receives the benefits in case of death of the latter.
2. ROP ( Return of Premium Plans)
In this type of term plan the policy holder receives the premiums paid on maturity of the policy if he survives. In a standard term insurance plan, if you are insured for 20 years and you outlive the plan, all the premiums paid is gone.
Advantages of ROP
- Forced Saving
Many people don’t have the habit of saving from what they earn, so if you are struggling to maintain your accounts especially for future planning then ROP is an ideal selection.
- Assured Death Benefit
A term insurance plans gives you coverage from 10 to 40 years which is a great future planning if you add ROP rider. If the policy holder dies, the beneficiary receives the money and your family is protected.
- Tax Free
The money returned in ROP rider is not considered as income and thus is not liable for taxation.
Disadvantages of ROP
- High Premium
Usually term plans are cheaper but this type of term plan where you receive your premium at the maturity have higher premiums to be paid. Due to high premium amount many people fail to continue to pay their instalments and this causes their policy to lapse. Also if you are above 40 years of age, it increase the premium amount.
- No refund on cancellation
With some insurance companies you can cancel your policy before its term end. In such a case you might be liable to some penalty and you will not get 1005 money back. Some insurers does not give any refunds on cancelation of your policy.
As the funds do not incur any taxes so do they not appreciate in their value. They get accumulated but do not grow as not interest is received on the premiums you pay.
3. Increasing Term Plan
In increasing term plan one has the option of increasing the frequency of the sum assured annually while keeping the premium same.
4. Decreasing Term Plans
Decreasing term is just the opposite of the above. The sum assured decreases year after year to match the declining needs of the policyholder. For example, an individual may buy a decreasing term plan if he has taken a huge home loan and is paying EMI’s on it. As the amount of loan decreases the sum assured also decreases as he pays off the loan amount in an equated manner.
Advantages of Decreasing Term Plan
This type of term insurance is much cheaper than level term plans. It is the best for you, if you are tight on your budget and still want to protect your family from the financial losses in your absence.
- Protects your mortgage
A decreasing term insurance protects your mortgages. In case of untimely death, your family may not be able to repay your home loans etc. In this scenario a decreasing term plan gives your protection.
Disadvantages of Decreasing Term Plan
- Reducing value
The amount of your policy will decrease with time. This means even if you are in the end of your term you will pay the same premium as against lesser rewards.
- Zero maturity value
The value of the policy in decreasing tem plan comes down to zero. If you survive till the end of your policy term, there is no chance of any payout on maturity.
5. Convertible Term Plans
Some Insurance companies offer convertible term plans where a term plan can be converted into any other insurance plan. For example, you have taken a term plan for 20 years and after 5 years you wish to convert it. You have the option to convert it into a whole life plan or endowment plan or any other plan of your choice.
6. Term Plan with Riders
Term plan is a unique insurance plan which has riders attached to it for the benefit of the policyholder. You can buy riders such critical illness or accidental rider, disability cover, etc. If you choose a rider with premium waiver benefit then you no longer have to pay you premiums in case of any disability. This is the cheapest plan among all insurance plans and it alone can take care of your family’s financial loss in your absence.
Let us discuss the riders in detail for more understanding. There are 6 riders that can be offered with a term plan
- Accidental Death Rider
Under this rider if the policy holder dies because of a road, industrial or plane accident during the tenure of his policy then his family will receive an additional amount for this rider.
For example: If you have a term plan for 50 lakhs and you have an accidental death rider along with it then your coverage for the same will be 5 lakhs. So if you die in an accident your dependents or family will receive the basic sum assured i.e. 50 lakhs + 5lakhs (accidental death rider).
- Accidental Disability Rider
Under this rider if the policy holder becomes disable due to accident he receives the sum assured either as lumpsum or as a monthly income for a fixed tenure. It can be for a 2 years, 5 years or even 10 years.
If the policy holder get permanently disabled then he get the full sum assure but in case of partial disability – for example if he loses his finger he receives partial sum assured as the benefit. The amount of sum assured to be received is decided upon the severity of damage as declared by the doctor.
- Critical Illness Rider
In this rider if the policyholder is detected of any critical illness mentioned in the policy (the list is of around 8 to 40 illness) he receives the sum assured for the treatment of the same.
For example:- A person has a tem plan of 1 crore and critical illness rider of 20 lakh and he is suffering from one the critical illness mentioned in the policy, he will receive 20 lakh for the treatment of the illness.
- Terminal Illness Rider
In case of terminal Illness rider option if a policy holder is suffering from an incurable disease and is likely to die in next 6 to 12 months, then the insurance company pays him or his nominee the sum assured without any delay.
For example:- An individual having a term plan of 50 lakhs with Terminal illness rider of 15 lakhs is suffering from cancer and is on its last stage, the doctor has declared that he might live for a few months – in this case the insurance company will pay him 15 lakhs immediately.
- Waiver of Premium (WOP) Rider
Waiver of premium riders are available with two options a) waiver of premium on disability and b) waiver of premium on critical illnesses
- Waiver of premium on disability
If the policyholder opts for the above rider and is disabled due to an unfortunate happening he will not have to pay the future premiums but the policy will remain active till its maturity period.
- Waiver of premium on critical illness
Under this policy if the policy holder has been detected of a critical illness his future premiums are waived off but the policy continues till its end term.
- Income Benefit Rider
Under income benefit rider if the policy holder dies his family receives the sum assured in fixed annual instalments as decided by the policy holder.
For example: A person having a term plan of 1 crore with income benefit rider with a duration of 10 years dies his dependents will receive this sum assured in a span of 10 years i.e. 10 lakh every year.
Riders make your term plan more comprehensive though they are a little more expensive. These riders prove to be beneficial in the time of need.
After a detailed discussion about various term plans and their different riders available let’s throw a glance on pros and cons of a term insurance plan.
Also Read: Insurance and Different Types of Insurance
Benefits of a Term Insurance Plan
- Term plan is the cheapest type of insurance that an individual can purchase.
- A term insurance plan is affordable as you can purchase the amount you want without paying huge premiums. This is true for young generation i.e. if a 20 year old purchases term plan, the premium he pays will be minimal as against a huge sum assured for his family protection
- Term life insurance helps to cover your obligations. If you have a home loan to pay off, in that case a term plan will pay off your loan in case of occurrence of untimely death.
- It is very simple to understand and does not involve complexity. It is a pure death protection.
- Term plan offers guaranteed rates as per your needs. You can ‘lock in’ rates for the number of years you want. These type of level term plans are very popular.
- Many term plans have the option of converting your policy into any other policy such as whole life or endowment policy without health proof.
Drawbacks of a Term Insurance Plan
Along with the above benefits there are a few drawbacks. Let us look into it:
- Premiums of term plan increases after the guaranteed duration. For example – if you have purchased a 15 year level term plan policy, there will be a significant increase in the premium after the end of 15th year.
- Term plans are designed to be temporary and thus they will be cost prohibitive at one point. If you require life insurance beyond your life expectancy then term plan is not at all suitable.
- Most people drop their term plans as they outlive the coverage and it becomes more expensive as premiums increase. They can no longer afford it.
- Most of the term plans do not build cash value. Even in Return of Premium policy there is no growth of the money invested as premiums. Thus there is no cash value.
To sum up the above article, “All about term insurance”, a term insurance is a must especially for the only bread winner to provide protection and security of his family in case of his unfortunate death. It is recommended to buy a term plan with riders that suits your needs at an earlier age as higher the age higher will be the premium.
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