People buy term insurance spending hours comparing premiums but spare only a few minutes picking the type of plan. Ideally, it should be the other way around. The plan you choose should determine how your cover will perform over a 20- or 30-year period and whether itβs relevant in times of crisis.
No matter how big or small the premium, itβs the variations of a term plan that matter, like whether the cover stays flat, grows or shrinks, how many years you pay for, and what happens if you survive it. The differences sound technical, but they map right to ordinary lives.
For example, someone whoβs 28, just started a new job, and doesnβt have any loans needs something different than someone whoβs 40, has a mortgage, and has two kids in school. You rarely realize youβve bought the wrong type of insurance on the day you buy it. Instead, you only find out years later, when the cover has run out or falls short when you need it.
Hereβs how each type of term insurance fits an individual with a particular plan so you can rule out what doesnβt apply.
Level Term Plan
This is the regular version of a term plan. The sum assured and the premium are fixed right from day one until the end. For most families, itβs the cheapest way to buy a lot of coverage.
The only hitch is inflation. So, βΉ1 crore paid out 20 years from now at 6% per annum buys about the same as βΉ31 lakh today.
However, that doesnβt make a level cover wrong because the needs of a family usually shrink as loans are paid off and children grow up. Nevertheless, the cover amount should be set generously right from the very beginning.
Convertible Plan
You can switch to a permanent policy, such as a whole life or endowment plan, within a window specified by theΒ convertible term plan. The selling point for a convertible term is that the conversion usually doesnβt require new medical underwriting. If you are in poor health, you may be able to get lifelong cover, which would otherwise be denied to you. The catch is expense. When you convert, you pay the premium for the new plan. The rate is usually figured at your age on the date you convert, and permanent plans are much more expensive than term insurance. Consider convertibility insurance for your future insurability, not a benefit you will surely use.
Before you buy, be sure to find out when the conversion window opens and closes. Also find out what plans you can switch to; some insurers offer just one or two.
Increasing Cover Plan
In this type of term plan, the sum assured increases annually by a percentage fixed at purchase, perhaps subject to a cap. You pay more than for level cover from the first year in return for protection that keeps pace with rising costs.
An increment term cover is suitable for a young person who expects more responsibilities. But there is an economic way. Certain level plans may allow you to increase your cover at events such as marriage, birth of a child, or a new home loan without the need for new medical tests. If youβre healthy and your plans are uncertain, that option can be a better value than paying for increases you may never need.
Decreasing Cover Plan
The coverage amount decreases over the life of the policy, generally at the same rate as the balance on a loan. The premium is lower because each year the risk to the insurer decreases. It is designed to pay off a home loan or business loan if the borrower dies.
Ideally, one should use a decreasing cover plan to pay off an existing loan. If a lender recommends a policy when you take out a loan, get an independent quote before you agree. A decreasing plan attached to the loan will never be enough to protect your familyβs living costs, while a level plan purchased separately will.
Return of Premium
A return-of-premium plan repays you the premiums you paid if you outlive the term, but the premiums are significantly higher than a normal term plan.
For example, a pure term cover costs βΉ10,000 per year, while the return-of-premium type costs βΉ20,000. The second scheme yields Rs. 6 lakh after 30 years. So, if you had taken a pure cover and invested the difference of βΉ10,000 at the end of each year at 7%, you would have about βΉ9.4 lakh before tax.
Simply put, the refund option only stands when you know you would spend the difference, not invest it.
Limited Pay And Single Pay
Limited pay term plans, where you pay premiums for a limited time, say before age 60 or within 10 years. Single pay is one premium at the start. Each payment is higher than under a regular-pay plan. The total you pay depends upon the plan, so compare the total outlay rather than the annual figure. Limited pay makes sense if you want your premiums to cease before your income ceases.
Cover To 99 Or 100%
Some term plans go to age 99 or 100, so they are almost a whole life cover at term prices. The extra decades add a premium. Theyβre worth paying for if someone will rely on you for life, such as a child with a disability, or if you want to leave a fixed sum to your heirs. For salaried families, coverage that ends between 60 and 70 is usually sufficient.
Group Coverage And Joint Life
Joint life plans insure a couple under one plan. Some pay only on the first death; some pay on each. One policy can be cheaper than two, but two separate policies are easier to administer if circumstances change and each partner can choose their own nominee. Employer-paid group term coverage is useful, but itβs temporary. It usually terminates the day you leave the job, and the amount is determined by your employer, not your family needs. So, think of it as an extra, not your main plan.
Closing Thoughts
Most households are left with just basic-level cover and sometimes a second policy for a loan. The ideal approach is to select one policy, and once it solves the intended problem, compare insurers on price and claims record to get another.Β
