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What is Term Insurance

Life Insurance

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Life Insurance article in Advisorkhoj - What is Term Insurance
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When it comes to ice-creams, plain vanilla is the most basic flavor up on which other ice-cream variants are developed. So, whether you buy an ice-cream sundae or a banana split, vanilla forms anessential part of the combinations. Similarly, when it comes to life insurance, a term insurance plan is the most basic form of life insurance. It is the essence of life insurance because the benefits under the plan are payable on the death of the life insured.

What is a term Insurance Plan

Before we embark on the definition of a term insurance plan, let us understand the basic components of a life insurance plan to understand the term insurance concept better. A life insurance policy has the following important components:

  • The Sum Assured

    – it is the amount of life coverage availed by the person buying the insurance (life assured)

  • The Premium

    – the consideration for the contract of life insurance, the premium is payable by the person buying the insurance plan to secure the insurance coverage.

  • Person insured

    – the individual whose life is secured by the contract of insurance is called the person insured. The person insured might also be the policyholder who owns the policy and pays the premium. Alternatively, the policyholder might also be a separate individual who owns the policy and pays the premium but the insurance is on the life of another individual. For instance, a husband buying a policy for his wife where the wife’s life is insured but the husband is the policyholder.

  • Plan term

    – this is the tenure, in years, for which the insurance coverage is bought.

  • Plan benefits

    – the benefits which the insurance company is liable to pay to the policyholder are called the plan benefits. There are broadly two types of benefits –

    • Maturity Benefit

      – which is payable when the plan term comes to an end and the plan matures

    • Death benefit

      – which is payable if the person insured dies during the tenure of the plan term.

Now when the basic components forming a life insurance plan are clear, the definition of a term insurance plan can be easily understood.

A term insurance plan is an insurance plan which pays the Sum Assured as the death benefit only if the person insured dies during the plan tenure. If the plan matures and the person insured survives the plan term, no benefit is usually payable. Thus, the term plan is the most basic form of an insurance plan covering only the death risk of the person insured.

Application of a Term Insurance Plan

Since the term plan only pays death benefits, it is widely snubbed by many individuals. People feel that in the event of plan maturity, since no benefit is payable, the premiums paid under the plan are lost. But is this belief justified?

While it is true that pure term insurance plans do not pay any maturity benefit, one cannot overlook the benefits which the plan provides and which no other form of investment, or for that matter, no other type of insurance plans can provide. The benefits are namely two:

  1. A High Sum Assured
  2. At low premiums

How are these beneficial you might ask, so let me explain -

High Sum Assured – do you know the rate at which inflation is rising? Is a little coverage enough to provide for the family a protection in your absence? Most of us agree that when buying a life insurance policy, a substantial amount of coverage is required so that the benefits which would accrue would be sufficient to meet the required lifestyle expenses of the family in absence of the life assured. However, such high coverages involve unaffordable premium rates and thus people end up with very little coverages which prove negligible.

A term insurance plan overcomes this dilemma because it is cheap. Policyholders can avail a high level of coverage at low premiums thus providing ample funding for their family without it eating into their pockets.

What are the types of Term Insurance Plans available

There are broadly four types of term plans available in the market today while the fifth variant of monthly income plans is an extension of term plans. Let us understand the variants:

  • Pure Term Insurance Plan

    – the basic term plan where benefits are payable only in case of death of the person insured and that too, within the stipulated tenure of the plan.

  • Term Plan with Return of Premiums

    – these plans solves the one bone of contention which regular term insurance plans have – lack of a maturity benefit. Return of premium plans is similar to term insurance plans in all respects. The only difference is that on maturity, these plans return the sum total of all premiums paid under the plan. Thus, as death benefit the Sum Assured is paid and as Maturity Benefit, the premiums paid are returned. Needless to say, these plans have a higher premium outgo than the Pure Term Insurance plans as they promise an additional Maturity Benefit.

  • Increasing Term Plans

    – in these types of term insurance plans, the Sum Assured increases steadily every year over the stipulated plan tenure. The rate of increase is pre-fixed and is mentioned in the plan features. The premiums for the plan, however, remain the same throughout the plan tenure and are a tad higher than pure term insurance plans as the Sum Assured increases over time. There is no Maturity Benefit payable under the plans as the plans only pay a Death Benefit. These plans are suitable for individuals who would like to increase their coverage in later years as their responsibility and income levels increases without an increase in premium.

  • Decreasing Term Plans

    – also called Mortgage Redemption Plans, these plans are an exact opposite to Increasing Term Insurance Plans. The Sum Assured under these plans decrease at a uniform rate every year over the plan tenure. These plans are loan redemption plans and are usually issued with loans. As the outstanding amount of loan reduces with each payment, the Sum Assured under the plan also decreases to reflect the outstanding loan balance. The rationale of the plan is to redeem the outstanding loan in case the insured dies before paying off the loan. Thus, the family is not burdened with any liability as the plan takes care of that.

  • Monthly Income Plans

    – these plans are a simple variant of pure term insurance plans. Where term plans pay a lump sum benefit of the Sum Assured on death of the insured, these plans pay the death benefit in monthly instalments over a fixed tenure post the death of the insured. Thus, Monthly Income Plan is that where the monthly incomes are instalments of the Sum Assured and can be level or increasing.

Types of Term Insurance Plans on the basis of distribution channels

This is actually a differentiation based on the selling channels as companies offer different online and offline term plans. So, the plans can be either pure term plans, return of premium plans or even monthly income plans sold either on the online platform or offline through the insurer’s distribution networks.

Customization of Term Insurance Plans

Along with life insurance plans, insurance companies also offer life insurance riders which help to customize your life insurance plan and make the coverage comprehensive. A rider is an additional clause which can be added to your base policy to increase the scope of coverage. Extra premiums are payable for adding riders and these premiums are very minimal. Riders pay benefits only if the event against which the rider is availed happens and there is a separate rider coverage which usually coincides with the base Sum Assured. Some common riders which can be added to a term insurance plan are as follows:

  • Accidental death benefit and disability rider

    – the rider pays an additional benefit when the insured suffers an accidental death or disability within the plan tenure.

  • Critical Illness Rider

    – the rider covers common critical illnesses which the insured might contract during the plan tenure. In case of diagnosis of any critical illness, the rider pays a lump sum benefit to the policyholder for treatment of such illnesses. The common critical illness that the term plans cover are – cancer, cardiovascular diseases, chronic respiratory diseases, diabetes, major organ transplant, heart attack and kidney failure etc.

  • Waiver of Premium Rider

    – a common rider which sometimes comes inbuilt within the plan features. The rider waives the future premiums payable if the insured faces any incident which is covered by the rider. The premiums would be paid by the company and the plan would continue without being affected through the provisions of the rider.

  • Term Rider

    – the rider pays a double death benefit if death occurs during the plan tenure.

  • Hospital Cash Rider

    – this rider is like a health insurance clause on your policy. The rider states that in case of hospitalization of the insured, the company would pay a fixed amount every day over the period of hospitalization subject to a maximum limit.

Conclusion

We understand that life is very unpredictable nonetheless you can establish a solid foundation for a lifetime of financial security and peace for your family by buying a term insurance plan. In this blog we also discuss what type of critical illness covers and riders are available with a term insurance plan. We believe that there is a good reason to buy critical illness covers and premium waiver riders along with term life insurance plans.

Health is the most important asset of our lives. Due to changing lifestyle habits, health issues have escalated and this might impose extra financial burden to your family. Therefore, it becomes imperative to have a term insurance plan with critical illness riders.

Our primary goal in life is to see our family secure, safe and happy all the times. Term insurance plan is the best insurance policy which provides your family with an umbrella of security.

Insurance is the subject matter of the solicitation.

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Advisorkhoj Research Team

Our research team has a combined experience of nearly 40 years in the financial services management and distribution, across the entire spectrum of product classes including mutual funds, insurance, equity broking and loan products. To contact our research leads, please see their contact information below.

Dwaipayan Bose: dwaipayan@advisorkhoj.com
Pradip Chakrabarty: pradip@advisorkhoj.com

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