Term insurance policy is a contract between the life insurance company and the customer where the life insurance company agrees to pay a defined sum assured to the nominee of the policyholder in case of sudden demise of the policyholder in return for an amount known as Premium to be paid by the policyholder to the insurance company at regular intervals of time. Term insurance is the cheapest life insurance policy compared to the other life insurance policies such as Endowment insurance, Money back insurance, ULIPS etc. The reason being the claim is payable only on the demise of the policyholder while the other policies even pay the survival benefit in case the policyholder survives the policy period.
Term insurance policy is designed to protect the financial situation of the family of the deceased in case of sudden demise of the policyholder. The sum assured under the term insurance policy is decided mutually before taking the policy and the premium is based on the age and sum assured selected in the policy. In case of death of the policyholder, nominee or legal heir can claim the death proceedings under the term insurance policy as per the terms and conditions mentioned under the policy copy. Pure term insurance policy covers only the death of the policyholder and no survival benefit is paid to the policyholder in case he/she survives the policy period.
Term insurance was introduced in India by Aegon Religare life insurance Company in the year 2009 prior to which the life insurance policy meant only savings and money back products. With the introduction of term insurance policies in India the life insurance penetration has seen a drastic growth with the term insurance policies taking the top place among other life insurance products. Life insurance awareness campaigns are being conducted by the insurance companies to increase the awareness among the general public and the Government of India is giving enough support by providing tax exemption for the premium paid under life insurance policies.
The COVID-19 pandemic has increased the awareness among people to have a life insurance policy which can provide financial security to the families in case of sudden demise of the bread earner of the family. The lucrative part in a term insurance policy is the less premium which is to be paid by the policyholder, since the premium is easily affordable by most of the people, it has become the easy to sell product. Reports suggest that there has been a 40% increase in the sales of online term insurance policies during the Corona Lockdown period due to the fear generated by the pandemic.
Let us understand the different types of Term Life insurance policies with illustrations and who should take which type of policy:
Level Term Insurance Plan:
What is it?
Level term insurance plan is a plan where the sum assured remains constant throughout the term of the policy period and the benefits are paid to the nominee on the death of the policyholder. In the level term insurance policies the sum assured selected by the policyholder at the inception of the policy will remain constant throughout the policy term and in case the policyholder intends to increase or decrease the sum assured, he/she would be required to purchase a new term insurance policy.
Level term insurance plans are the most common type of term insurance plans available in India. These term insurance plans have the same sum assured and premium amount throughout the policy period thereby making them unsuitable for longer terms. Some companies might provide an option to change the level term insurance plans to other type of term insurance plans based on satisfactory underwriting.
How it works?
Mr. Jain aged 28 years working in an MNC thought of purchasing a level term insurance policy. His annual salary is 10 Lacs including the bonus and extra pay. After consulting his insurance advisor he came to know that he can get sum assured up to 15 times of his annual salary. So, he opted for level term insurance plan with sum assured 1.5 Crore and a premium of Rs.25k per year with tele medicals as his age was preferred by the life insurance companies.
After paying premium for 5 years Mr. Jain thought of increasing the sum assured under his life insurance policy as his salary has been increased to Rs.20 Lacs but he came to know that he cannot increase the sum assured under the existing term life insurance policy and a new term life insurance policy is to be purchased. But for such high sum assured term insurance policy he needs to undergo physical medical examination and taking his condition of pre existing diseases, the life insurance company may load his premium due to the risk involved.
Who should take it?
Since the level term insurance doesn’t have the option of increasing the sum assured as and when required, it is advisable for people to opt this kind of plan if the policy term is less than 10 years. For term plans with more than 10 years policy term the level term insurance plan may not be beneficial as the cost of living would be increased and the sum assured under the plan would remain constant.
One more disadvantage with the level term plan insurance policy is that the midterm increase or decrease of the sum assured might not be permitted by the insurer. In short the level term insurance policy is suitable for people who are opting the shortest policy term.
The premium to be paid under the level term insurance plan would remain constant throughout the policy period and so the sum assured. In future if the premium payment capacity of the policyholder increases, there would be no chance to increase the sum assured by paying extra premium.
Increasing Term Insurance Plan:
What is it?
The increasing term insurance is a type of term insurance policy in which the sum assured of the policy increases with the completion of each year. The sum assured in second year would be greater than that of the first year and so on up to a certain limit mentioned under the policy. The premium under the increasing term insurance policies would remain constant throughout the policy period whereas the sum assured keeps on increasing at a certain percentage.
The percentage of sum assured to be increased each year can be chosen by the policyholder at the time of taking the policy. Normally the percentage ranges from 5% to 15% depending on the insurance company. The premium also changes depending on the slab selected by the policyholder. Higher the percentage, higher would be the premium to be paid under the increasing term insurance policy.
How it works?
Let us assume Mrs. Asha working in Software Industry wants to take a term life insurance policy till 60 years which would be the age of her retirement. She wanted to take only one term life policy which can cover her needs till the age of retirement and has chosen increasing term insurance policy. She opted for the highest available increase in percentage option and chose the sum assured as 15 times her annual income.
She has taken a sum assured of Rs.1 crore and increment percentage as 10% under the increasing term insurance policy with an annual premium of Rs.35k. For the second year her sum assured would be 1 Crore + 10% of the basic sum assured which would be Rs.10 Lacs. The combined sum assured for the second year would be Rs.1.10 Crore and in case of her sudden demise the complete amount would be payable to her nominee. In this way the sum assured would be increased each year until it reaches a certain limit under the increasing term insurance policy.
Who should take it?
Increasing term insurance policy is mainly suitable for people who have drastic changes in their salary with each passing year and those who would prefer to have a single term life insurance policy. These days most of the people working in demand sectors such as IT, AI etc can opt for the increasing term insurance policy.
It is important to remember that one single term insurance policy cannot cover your life insurance requirements till your retirements as the incremental increase has a limit to it at a certain point of time the sum assured under the policy may be less than 15 times of the annual income of the policyholder.
The increasing term life insurance plans can be effective to combat inflation and or changing circumstances. The cost of increasing term insurance plans would be higher than that of the level term insurance plans and decreasing term insurance plans.
Decreasing Term Insurance Plan:
What is it?
Decreasing term insurance plan is the type of term insurance plan in which the sum assured under the policy would be decreasing with each passing year. The percentage to be decreased under the plans can be pre defined and the sum assured decreases every year until either the policy pays out or the coverage period comes to an end.
The decreasing term life insurance policy’s premium would remain constant throughout the policy term whereas the sum assured decreases till the end of the policy term. The percentage of decrease under the decreasing term insurance policy depends on the option selected or a certain percentage until the policy is paid out.
How it works?
Mrs. Lincoln has taken a home loan of Rs.1 Crore for a period of 15 years from a Nationalized Bank. To secure the loan bank has suggested her to opt for decreasing term insurance policy till the completion of the loan term. The sum assured under the policy would be the loan amount taken and the policy period would be the loan term i.e. 15 years.
Mrs. Lincoln has paid Rs.10 Lacs in the first year and the sum assured in the second year of policy would be the remaining loan amount which is Rs.90 Lacs. In this way the sum assured at any point of time would be the outstanding loan amount under the decreasing term insurance policy. The policy would expire when the entire loan would be repaid or till the end of the loan period.
Who should take it?
Decreasing term life insurance policy is normally taken by people to cover specific debt such as Home loan, Personal loan etc. since the sum assured decreases with the decrease in the loan amount. Usually the sum assured comes to zero at the end of the policy period or after the early repayment of loan.
The premium under the decreasing term insurance policy is less and is the cheapest product available in the market. The premiums payable in case of decreasing term insurance product would remain constant throughout the policy period.
Return of Premium Term Insurance Plan:
What is it?
The Return of premium term life insurance plan is the plan where the premiums paid by the policyholder under the term insurance plan will be returned by the life insurance company to the policyholder in case the policyholder survives the policy period. In case of death during the policy period, the nominee would receive the sum assured mentioned in the policy copy.
This kind of policy has been brought into the Indian market after thinking about the mindset of Indian people. Most of us think that the premium paid under the term insurance plan would be wasted if we outlive the policy period and thereby paying the premium would be of no use. So to counter this mindset the insurance companies have introduced the life insurance return policy which returns the entire premium if the policyholder survives and settles the sum assured to the nominee if the policyholder expires during the policy period.
How it works?
For instance, let us assume that Mr. Mallik has thought of purchasing a term insurance plan with the policy period being his retirement age, but was not ok with the traditional term insurance plan which doesn’t pay any survival benefit. Instead he opted for Return of premium term insurance plan with a sum assured of Rs.2 Crore and the yearly premium to be paid is Rs.10k for a period of 20 years.
In case of death of Mr. Mallik within the policy period, the entire sum assured under the policy would be paid to the nominee and in case of survival the insurance company would pay him Rs.2 Lacs (Rs.10k per year * 20 years) i.e. all the premiums paid under the policy. In this way Mallik can get both the death benefit and survival benefit under the Return of premium term insurance plan.
Who should take it?
Return of premium term insurance plans are suitable for those who would wish to have both the death benefit and the survival benefit in a single term insurance policy. One more thing to note here is that the premium under the Return of Premium Term insurance policy would be greater than any other term insurance policy and a part of premium paid by the policyholder goes for live coverage and the remaining part goes for the investment to repay the premium amount at the end of the policy period.
Term Plan with Riders:
The coverage under the above term insurance plans can be extended by opting for the Add-ons or Riders such as Critical Illness, Waiver of premium, Accidental Disability rider. Extra coverage comes with extra premium to be paid by the policyholder under the term insurance policy. Let us understand the coverage under each add-on or Rider.
- Critical Illness: Critical illness can be defined as any life threatening disease or illness which reduces the chances of living and the treatment for which would be prolonged. Most of the term life insurance policies cover a certain number of illnesses under the Critical illness add-on on payment of extra premium. The sum assured under the add-on is above the base sum assured under the policy.
- Waiver of Premium: In case of accidental disability or diagnosis with critical illness the future premium payable under the term insurance policy would be waived off by the insurance company under the Waiver of Premium rider. The Waiver of premium rider is sometimes inbuilt and sometimes offered as an add-on under the term insurance policy.
- Accidental Disability: Accidental disability rider covers the claim in case of death or disability of the policyholder due to accidental means. The claim payout under this rider would be the sum assured selected under this rider which is in addition to the base sum assured under the policy. In case of death of the policyholder due to an accident the base sum assured of Rs.1 crore term insurance and the Rider sum assured of Rs.50 Lacs would be paid to the nominee of the policyholder.
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