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There are various types of term insurance plans like Level Term, Increasing Term, Convertible Term, Joint Term, Group Term, and No-Cost Term Insurance. Each plan serves different needs, from individual to joint and employer-provided coverage. Understanding their features helps in choosing the right one. Comparing benefits ensures the best fit for your family's financial security.
What is Term Insurance?
Term insurance is a life insurance plan that provides coverage for a set period, called the ‘term.’ If the policyholder passes away during this time, the insurance company pays a lump sum amount to their family. Unlike some life insurance policies, term insurance does not give any payout if the person survives the term, unless they choose a Return of Premium (TROP) plan. It is an affordable way to ensure financial security for your loved ones.
There are various types of term life insurance policies in the market, each catering to different financial goals and protection needs. Let’s take a closer look at the different types of term insurance available:
Level Term Insurance is the simplest and most common type of term insurance. The coverage amount or “sum assured” remains constant throughout the policy duration, and the premiums are also fixed. This straightforward structure makes it ideal for families seeking stable coverage over a specific period. However, if you’re looking for flexibility or a cash value option, you might want to explore other term life insurance types.
Example:
Ramesh, a 40-year-old father of two, buys a Level Term Insurance policy with a ₹1 crore sum assured for 25 years. His coverage remains constant, ensuring financial security for his family if anything happens to him. Unfortunately, he passes away in the 15th year of the policy. The insurer provides his family with ₹1 crore, helping them cover daily expenses, education, and loans.
Increasing term insurance is designed to keep up with inflation. In this type of term life insurance, the coverage amount gradually increases over the policy tenure, usually by a predetermined percentage. While this may lead to a higher premium over time, it helps ensure that the policy coverage value matches future financial needs, such as growing family expenses or loan repayments. Increasing term insurance can be a wise choice for young policyholders aiming for long-term financial stability.
Decreasing term insurance works inversely to increasing term plans. Here, the sum assured gradually decreases over time, often aligning with a loan or mortgage balance that reduces over the years. This type is ideal for individuals with significant liabilities, such as a home loan, as it provides coverage aligned with the outstanding debt. It is a cost-effective solution to protect your loved ones from financial burdens without paying for excessive coverage.
Unlike regular term insurance, term insurance with return of premium (TROP) offers a maturity benefit. If the policyholder survives the policy term, all premiums paid are returned, making it a viable choice for those who prefer getting something back from their insurance plan. While TROP plans come with slightly higher premiums than standard term insurance, they provide a form of financial reassurance for those looking to benefit in case of survival.
Convertible term insurance offers the flexibility to convert your term insurance plan into a different type of life insurance, such as a whole life or endowment policy, at a later stage. This can be beneficial if your financial goals evolve and you want coverage that goes beyond a certain term. This type of plan is suitable for those who may not yet need permanent coverage but want the option to transition in the future.
Whole life insurance extends beyond the standard term by providing coverage for the policyholder’s entire life, often up to 99 years or more. It combines the features of a term plan with the longevity of permanent coverage. Whole life insurance ensures that your family will receive a payout whenever you pass away, regardless of your age. While premiums are higher, this type of policy suits individuals with long-term dependents or those looking for estate planning solutions.
No-Cost Term Insurance Plans let policyholders exit the policy at a set time and get back the premiums they have paid. In regular term plans, premiums are not refunded if the policyholder survives the term. However, with no-cost term insurance, you have the flexibility to leave the plan without losing all your money.
Joint Term Insurance is a type of term plan designed for couples, where both partners are covered under a single policy. Instead of buying separate term insurance plans, a joint policy provides financial protection for both individuals, ensuring security for the surviving partner in case of the policyholder's death.
Group Term Insurance is a life insurance plan provided by employers, organizations, or associations to cover a group of individuals under a single policy. It offers financial protection to employees or members at minimal or no cost.
Choosing the best term insurance policy for your needs involves evaluating several factors. Let’s break down these considerations to help you make a well-informed decision:
Assessing the coverage amount or sum assured is essential. Think about your family’s future expenses, debts, and lifestyle requirements. The aim is to ensure the sum assured will sufficiently cover financial obligations and provide a stable income replacement for your family. Many experts recommend using a term insurance calculator to accurately determine your coverage needs.
Your policy duration should align with the time frame in which your family might need financial support, often until major liabilities are covered or children are financially independent. For instance, you might choose a policy term that extends until your retirement or the end of your mortgage tenure.
Premium affordability is critical in term insurance planning. Different types of term life insurance have varying premiums, so consider your budget when choosing a plan. TROP plans, for example, are generally pricier than basic term insurance, while decreasing term plans can offer more affordable premiums.
An insurer’s claim settlement ratio is an indicator of reliability, showing how often the insurer successfully settles claims. Choosing a provider with a high claim settlement ratio can provide peace of mind that your family will receive financial support promptly when needed.
Many term insurance plans offer optional riders such as critical illness cover, accidental death benefit, or waiver of premium in case of disability. Riders can enhance your policy coverage, making it more comprehensive. For example, a term insurance plan for a housewife may include critical illness riders to provide financial support if health challenges arise.
Example: Amit, 35, buys a term plan with a Critical Illness Rider. A few years later, he is diagnosed with a heart condition and needs expensive treatment. Thankfully, his rider provides a lump sum payout, covering medical bills and lost income. This financial support ensures his family’s stability without draining his savings.
Selecting the right type of term insurance involves understanding your long-term goals and aligning them with your family’s financial needs. Whether you’re considering a simple level-term plan, exploring the flexibility of convertible options, or looking for whole-life coverage, it is essential to make an informed choice that supports your family’s financial future.
Remember, each type of term plan offers unique benefits, so take time to evaluate your current and future requirements to find the plan that best suits your life and financial journey.
1
Increasing term insurance offers a rising sum assured over time, adjusting for inflation, while decreasing term insurance provides coverage that reduces, often aligning with a decreasing loan balance.
2
Certain policies, like convertible term insurance, allow you to convert your policy into another type, but not all plans offer this flexibility.
3
Return of premium term plans (TROP) return the premiums paid if the insured survives the policy term, combining coverage with an element of savings.
4
Group term insurance provides coverage to a group, typically offered by employers, with lower premiums but usually limited coverage. Individual term insurance is tailored to an individual’s needs and offers greater flexibility.
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For long-term financial planning, Whole Life Insurance or Level Term Insurance can be suitable choices, ensuring coverage and stability over an extended period.
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
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