Types of Term Insurance

Fundamentally, term insurance is fairly simple. You buy a term insurance policy from an insurance company in exchange for a predecided premium amount. In case of an unfortunate death of the policyholder during the tenure of such policy, the dependent receives ‘sum assured’ as provided in the policy. Term insurance is typically an expense in the hands of the policyholder.

Hence, if you survive the tenure (of the policy), you end up getting nothing as it is a pure protection plan meant for your family’s future financial security.

However, there are a few other classifications of term insurance that you can consider. Based on your personal preferences, risk tolerance, and goals, you can make an informed decision.

Categories of Term Insurance

Here are the most common types of term insurance offered by Indian insurance companies:

1. Standard term insurance: This is the basic form of life insurance where you get protection and future security with no savings element. It is a highly affordable and simple plan that is quite popular.

2. ROP (return of premium) term plan: This plan offers policyholders dual benefits. Besides the protection element, you also get all the premiums paid at the end of the policy term. Hence, it is not a pure protection plan, as you are also offered a capital guarantee. This plan's premiums are typically more than the standard term insurance options.

3. Increasing term plan: An increasing term plan is designed to counter the effects of inflation and an individual's increased personal liabilities. The plan keeps the total coverage increasing over the years.

4. Reducing term plan: This is the opposite of an increasing term plan. Under this plan, the sum assured decreases over the policy term. This is typically aligned with the policyholder's reducing liability or debt, such as a home loan.

5. Convertible term plan: This plan allows you to convert your term plan into a different type of life insurance, such as a whole life or endowment, typically without undergoing further medical examination.

6. Term plan with riders: Some term insurance plans provide additional benefits such as critical illness, accidental death, or disability riders. These plans enhance overall coverage and help manage a policyholder's risk.

A working example

Let us come back to the example. Ronit is confused between the standard plan and the ROP option. Here is what his coverage and costs would be in the two different alternatives:

The ROP plan offers Ronit a similar sum assured with almost double premium. However, he is entitled to receive the entirety of the premium paid during the 40 years at the end of the term.

However, if he follows the standard plan, he will save approximately ₹11127 per year, which can be invested in a mutual fund, such as the Nifty 50 Index Fund. Based on the fund's ten-year average return (12.00% approx.), the reinvestment amount will be ₹95,59,677.

The choice of Term Insurance

It purely depends on the individual. You can select plans based on the existing and future obligations, current income levels, number of dependents, and risk preference. The most critical thing is term insurance, which secures your family’s future.

Summing up

Term insurance is highly critical for your personal financial goals. It is simple, straightforward and highly affordable. These are a few reasons for its popularity. Out of the different categories, you can choose any one based on your financial situation, goals and risk preferences.

However, understanding these options is critical to making an informed decision. An alternative that looks profitable initially might not suit you long-term. Hence, you must carefully analyze all options. It is always beneficial to consult experts and financial advisors to make the best decision.

FAQs

What happens if I outlive my term insurance policy?

If you outlive your term insurance policy, you will not receive any payout unless you have a return of premium (ROP) plan, which refunds all premiums paid at the end of the term.

Can I convert my term insurance to a whole-life policy?

Yes, suppose you have a convertible term plan. In that case, you can convert it to a whole life or other permanent life insurance policy without a medical exam, typically within a specified period.

Are there any additional benefits I can add to my term insurance plan?

Yes, you can enhance your term insurance with riders such as critical illness, accidental death, and disability, providing additional financial protection for specific circumstances.

How does an increasing term insurance plan protect against inflation?

An increasing term insurance plan adjusts the sum assured upward annually to keep pace with inflation, ensuring that the life cover remains adequate.