Did You Know About These 10 Types of Term Insurance Policies?

What's inside? 🧐

• Introduction
• Types of term insurance policies

Introduction

When you set out to buy a term insurance policy for your family’s financial safety, you’ll come across many types. Each type serves a different purpose. Some term plans provide financial security to your family, some offer a payback if you survive the policy period, others allow you to cover your spouse under the same plan, etc. Before you decide which type of term plan to buy, it is important to educate yourself on all the options that exist so that you can make an informed decision.

In this article, let’s take a look at all the variants of term plans available today and understand how each variant works.

Let’s dive right in!

Types Of Term Insurance Policies

👉 Based On Premium Payment Term

1️⃣Regular Pay Term Insurance

Under a Regular Pay Term Insurance policy, you’re required to pay the premiums regularly, till the end of the policy duration you choose. So, this plan’s premium payment term (period for which you need to pay the premiums) will be the same as the policy duration.

This is the most basic type of term plan available today and is offered by almost all insurance companies in the market.

• Who Is This Useful For: Salaried people with fixed and recurring income.
• Pros: This insurance plan is relatively cheaper, making it affordable to a wide range of individuals.
• Cons: It has a long premium payment duration. Additionally, it does not provide surrender benefits.
• Things To Be Careful About: You should be cautious about the risk of missing premium payments. Setting up a standing instruction (SI) for payments can help ensure timely and consistent payments, avoiding policy lapses.

Swapna purchases a Regular Term Insurance Plan for a duration of 45 years and a sum assured of Rs. 3 Crores. So, she’ll have to keep paying the premium as long as her policy is in force, i.e., for 45 years. In case she passes away in the middle of the policy duration, the insurance company will pay the claim of Rs. 3 Crores to her nominee.

2️⃣Limited Pay Term Insurance

This plan allows you to finish your premium paying liability in a few years compared to the policy duration you choose. Meaning, you can complete all your premium payments in a ‘limited’ number of years, irrespective of the policy duration you select.

• Who Is This Useful For: Individuals with fluctuating income, such as self-employed individuals and freelancers, who want to quickly relieve themselves of premium payment liabilities.
• Pros: This insurance plan allows you to get the premium payment burden off your chest swiftly. Additionally, it offers a surrender benefit after two years of policy ownership.
• Cons: This plan tends to be more expensive compared to other options  in the market.
• Things To Be Careful About: It's crucial to carefully select the type of insurance plan that suits your needs. Make sure to check whether the type of coverage you require is available with the specific product you're purchasing. Setting up a standing instruction (SI) for premium payments is recommended to ensure timely and consistent payments, reducing the risk of policy lapses.

Nisha, a badminton player, buys a Limited Pay Term Insurance with a sum assured of Rs. 2 Crores. She buys the plan for a tenure of 40 years and opts for a premium payment term of 20 years. So, this means that she’ll be covered under the term plan for 40 years - but she can complete her premium payments in 20 years.

3️⃣Single Pay Term Insurance

Under this type, you just have to make a single premium payment. You need to pay the premium at the time of buying the term plan - and then, you and your family can enjoy the term cover for the rest of the policy duration.

• Who Is This Useful For: Individuals who have received a substantial sum of money through willful gains, inheritance, or gifts.
• Pros: This insurance plan allows you to pay your premium in a lump sum, offering convenience and immediate coverage. Additionally, it provides a surrender benefit.
• Cons: This option is considered to be the most expensive among insurance plans.
• Things To Be Careful About: You should be mindful of the Section 10(10D) deduction. It's essential to understand and consider the tax implications associated with such deductions before making decisions about this insurance option.

Rakhi purchases a Single Pay Term Insurance for a duration of 50 years and a cover amount of Rs. 2 Crores So, in this case, she’ll have to pay the premium only once, at the time of purchase. She’ll be covered under the policy for a duration of 50 years.

👉 Based On The Level Of Sum Assured Throughout The Policy Tenure

1️⃣Level Term Insurance

The sum assured under a Level Term Plan remains constant throughout the policy duration - it will neither increase nor decrease.

• Pros: This insurance plan offers low premiums, making it an affordable option for many.
• Cons: It may not adequately protect your family against inflation, as the coverage amount might not be sufficient over time.
• Things To Be Careful About: When considering this plan, it's crucial to factor in inflation while calculating the cover amount. Since this plan may not provide adequate protection against inflation, it is essential to factor in the inflation rate while calculating the cover amount.

Himadri, 35, buys a Level Term Insurance Plan with a cover amount of Rs. 1 Crore for a duration of 35 years. Because she has opted for a Level Term Plan, the sum assured will remain constant throughout the policy period. If she passes away while the plan is active, her nominee will receive a claim of Rs. 1 Crore.

2️⃣Increasing Term Insurance

Under an increasing term insurance plan, the cover amount will keep increasing periodically up to a maximum limit specified by the insurer. Such plans are specifically designed to help combat the effects of inflation and increasing financial responsibilities. With this plan, you can ensure that your family will be covered adequately, always.

• Who Is This Useful For: This insurance plan is suitable for everyone, especially those looking to beat inflation and cover their increasing financial responsibilities over time.
• Pros: One of the key advantages of this plan is that it helps beat inflation, ensuring that your cover amount keeps pace with rising costs and financial obligations.
• Cons: It tends to be more expensive compared to a level term plan, which offers a fixed coverage amount throughout the policy term.
• Things To Be Careful About: When considering this plan, it's important to be aware that not all insurance plans offer this option. Additionally, you should pay attention to the details such as the year when the cover starts increasing, the percentage of increase every year, and the maximum increase in cover possible. Understanding these factors will aid you make an informed decision about the suitability of this plan for your family’s needs.

Manvi, 40, buys an increasing term plan for a duration of 50 years and a sum assured of Rs. 1 Crore.

As per the policy terms and conditions, the sum assured under her policy will -

• Increase by 20% every year until it reaches a maximum increase of 2X the base sum assured.
• Start increasing from the 11th policy year.

Let’s understand how the sum assured cover will increase under Manvi’s policy with the help of the below table.

Since the maximum allowed increase is up to 2 Crores (2 times the base sum assured), there will be no further increase under Manvi’s policy after the 15th policy year.

3️⃣Decreasing Term Insurance

As opposed to an Increasing Term Insurance Plan, the sum assured under a Decreasing Term Insurance Plan decreases at a predetermined rate once every 5 years. It decreases till it reaches a maximum limit of typically 50% of the base cover.

Basically, as you grow old, your liabilities and financial responsibilities might reduce. And, the need for a higher sum assured might decrease as well. So, if you have loans/liabilities which you expect to pay off in the near future, a Decreasing Term Plan can be a good fit for you. In case you pass away while the plan is in force, the insurer will pay the decreased sum assured to your family which can be used to settle the loan/liability.

• Who Is This Useful For: Individuals with loans or liabilities who want to ensure that these financial obligations are not passed on to their family in case of their demise.
• Pros: This insurance option is cheaper than a level term plan, and in some cases, the premium may also decrease over time.
• Cons: However, the life cover decreases over the policy term. This means that if you're relying on this term plan for both loan protection and your dependents' financial security, the coverage may not be sufficient as the loan decreases but your dependents' needs remain constant or increase.
• Things To Be Careful About: It's important to understand that a level term insurance provides a steady and higher death benefit throughout the policy's life. Unless you anticipate that your need for life insurance will decrease significantly over time, we recommend considering a more stable policy like level term life insurance. Additionally, ensure that the cover amount decreases in line with the loan amount you've taken to avoid any coverage gaps.

Ananya has some loans and liabilities, and to prevent the burden of repaying them to fall on her family’s shoulders in her absence, she buys a decreasing term insurance plan. She chooses a duration of 50 years and a sum assured of Rs. 2 Crores.

Let’s assume -

• The sum assured under her plan will reduce by 10% once every 5 years.
• The sum assured will be reduced up to 50% of the base sum assured - it will be reduced up to Rs. 1 Crore.

Let’s understand how the sum assured under Ananya’s plan will decrease with the help of the below table.

So, this is how the sum assured under Ananya’s policy will decrease. If she passes away while the plan is active, the sum assured applicable in that year will be paid to her nominee.

👉 Other Types

1️⃣Whole Life Term Insurance

Just like the name suggests, a Whole Life Term Insurance Plan provides a cover for your entire life - till 99/100 years of age. These plans are a sure-shot way of leaving behind a financial legacy for your loved ones. Why? Because the life expectancy is much lower than that, and hence, it is less likely that you would survive such a long term.

• Who Is This Useful For: Individuals who want to leave a financial legacy and ensure coverage for their entire life.
• Pros: This insurance plan provides coverage for your entire life, offering peace of mind and financial security for your loved ones.
• Cons: It is expensive compared to other insurance options due to the lifelong coverage feature.
• Things To Be Careful About: When considering this plan, opt for a limited payment option rather than regular payment. Additionally, not all insurers provide this option, so it's essential to research and compare different plans before making a decision.

Ramesh buys a Whole Life Term Insurance Policy up to the age of 100 years with a cover amount of Rs. 2.5 Crores. At the age of 95, he passes away due to a heart attack. In this case, the insurer will pay a sum of Rs. 2.5 Crore to his family.

2️⃣Joint Life Term Insurance

A Joint Life Term Insurance Plan is a type of term plan that you can jointly purchase with your spouse. Both you and your spouse will be covered under a single policy, where you will be the primary life assured and your spouse will be the secondary life assured.

Under a Joint Life Term Insurance Policy, the cover amount for both you and your spouse will either be separate or shared.

If the sum assured is separate, your spouse, who is the secondary life assured, will have a cover amount that is -

• Equal to your cover amount, or
• 50% of your cover amount, or
• 25% of your cover amount.

This will vary across insurance companies.

In the unfortunate event of the death of one spouse, the cover amount of that spouse will be paid to the surviving spouse. And if the surviving spouse passes away, too, during the policy term, the cover amount of that spouse will be paid to the nominee of the policy.

• Who Is This Useful For: Individuals who want to cover their spouse under the same insurance plan for convenience and simplicity.
• Pros: This arrangement allows for easy maintenance of insurance coverage for both individuals under a single plan.
• Cons: It’s important to note that some insurance plans may not allow you to choose riders, limiting customization options. Additionally, very few policies offer this joint coverage option.
• Things To Be Careful About: When opting for this plan, be mindful of any sum assured restrictions that may apply, as your wife may have higher cover requirements.

Prem and Preeti purchase a Joint Life Term Insurance Policy where the sum assured is separate. They opt for a duration of 60 years. Under the policy, Prem’s cover amount is Rs. 1 Crore and Preeti’s cover amount is Rs. 50 Lakhs. They have appointed their son, Divit, as the nominee.

Let’s say Preeti dies in an accident in the 33rd policy year. In this case, Prem will be paid the cover amount of Preeti, i.e., Rs. 50 Lakhs. In the 55th policy year, Prem passes away due to a heart attack. In this case, Divit (nominee) will receive Prem’s cover amount, i.e., Rs. 1 Crore from the insurer.

If the sum assured is shared, both you and your spouse will have a shared cover amount - and the insurer will process the claim on a first-death basis. Meaning, the claim will be paid on the death of the first life assured, and then the policy will be terminated.

Amar and Sanya buy a Joint Life Term Insurance Policy where the sum assured is not separate. They buy the policy for a duration of 40 years and with a sum assured of Rs. 50 Lakhs. Let’s say Amar passes away in the 36th policy year. In this case, the insurance company will pay Sanya the claim amount of Rs. 50 Lakhs, and then, the policy will terminate.

3️⃣Term Return Of Premium (TROP) Plan

The policies we discussed above only provide a death benefit, i.e., a certain amount of money, in the event of your death within the policy's term. There is no maturity benefit payable under them. Meaning, the insurer won't make any payments if you outlive the policy's term.

If you’re not happy with such a proposition, you can consider buying a Term Return of Premium or TROP plan. This plan offers a maturity benefit in addition to a death benefit.

If you pass away while the policy is active, the insurer will pay the death benefit to your family. And, if you survive till the end of the policy term, the insurer will pay you a maturity benefit in the form of returning all the premiums (excluding taxes) paid under the plan.

• Who Is This Useful For: Individuals who wish to receive benefits upon surviving the policy term.
• Pros: This insurance plan offers a maturity benefit, providing a lump sum payout if you outlive the policy term. Additionally, it includes a surrender benefit, offering flexibility.
• Cons: This plan typically comes with expensive premiums compared to basic term plans.
• Things To Be Careful About: When considering this plan, carefully evaluate the premiums you receive back, factoring in the time value of money (NPV). It may be more financially prudent to invest in a regular term plan and utilise the extra amount saved in premiums to invest in other financial instruments for potential higher returns.

Nayan buys a Term Return of Premium Plan for a duration of 50 years and a cover amount of Rs. 2 Crores. Let’s assume he is required to pay a premium of Rs. 50,000 (excluding taxes) every year for a period of 50 years.

Nayan’s nominee will receive the death benefit of Rs. 2 Crores if he passes away in the middle of the policy term. And, if he doesn’t, the insurer will pay him back all the premiums he paid under the policy. So, he’ll get a maturity benefit of Rs. 25,00,000 (50,000 x 50).

4️⃣Group Term Insurance

A Group Term Insurance Policy covers a large group of people under a single policy. This type of term plan is typically provided to employees by their employers, account holders by the banks, etc.

Basically, the insurer provides the master policyholder, i.e., the employer, bank, or organisation with a master policy. The master policyholder will select the features, customisations, and other aspects of the insurance policy as well as pay the premiums. They will then issue the cover to all the employees, account holders,  members of the group, etc.

In case any employee/member passes away during the plan’s tenure, their nominee will receive the death benefit, i.e., a fixed amount of money.

• Who Is This Useful For: Individuals who are not eligible for an individual term plan.
• Pros: This insurance option typically offers cheap or free premiums, allowing you to either not pay premiums or pay significantly less compared to individual plans.
• Cons: It may not be personalised to your unique needs and circumstances.
• Things To Be Careful About: It's important to note that the coverage is often linked to your membership or affiliation with a specific group or organisation. Therefore, if your membership status changes, your coverage under this plan may also be affected.

So, these are the 10 types of term insurance policies available today. If you have any questions about insurance, you can post them on the MyInsureBuddy Insurance Forum and get answers from experts!