What is Term Insurance Policy and Types of Term Insurance

Term Insurance Definition:

Under this insurance, coverage is for a specified amount of time. Beneficiaries are paid at face value of policy and are protected from any financial losses upon death. Maximum duration for the term insurance is usually 35 years. Term life insurance is most frequently selected policies from life insurance. It is very useful if you require life cover for limited duration and “premiums for Term Insurance are much cheaper” than any other type of life insurance. It is always recommended to buy this policy between 27-32 years of age for 30-35 years of duration. Major disadvantage of this policy is that there are no benefits or sum assured upon survival after expiry of policy term.

Term Insurance Example: Mr. David at 29 years of age purchased Term Insurance policy valid for 35 years for sum assured of Rs.75,00,000/- and he died at the age of 60 years. Since policy is valid upon death, insurance company offer will pay beneficiaries Rs.75,00,000/- as sum assured after death of Mr. David.

Types of Term Insurance Policy:

1. Annual Renewable Insurance Plan: These types of term plan provide life cover for one year which can be renewed at the higher premium rate thereafter without any proof of insurability. There are some policies requires proof of insurability upon renewal. Major disadvantage of annual renewable term insurance policy is that premium of the policy changes every year. In other words policy holder has to pay higher premium year after year upon renewal.

2. Level Insurance Plan: In these types of term plan premium is fixed for specified years. After that policy may be renewed with higher premium rate. Premium rates get higher with increase of age for the term insurance. Note that renewal is limited upto certain age or maximum policy tenure. It cannot be renewed for the entire life of policyholder. Level Term Insurance Example: Mr. Sachin at the age of 29 years has bought the level insurance plan for 25 years where maximum policy tenure is 35 years of age. In that case upon survival after 25 years, Mr. Sachin can renew policy for additional 10 years with new premium rates.

3. Return of Premium Insurance Plan: Under this plan, insurance company will return some of the premiums paid upon survival and expiry of the insurance plan. Premiums of this kind of policies are much higher when compared with normal term insurance policy. When returning premium, insurance company will deduct fees or expenses occurred while holding policy. Mostly 70% – 80% of the premium amount is returned under this policy plan.

4. Decreasing Insurance Plan: Under this insurance, premium of the policy changes at specified levels and corresponding death benefit also keep on decreases with duration. Premium paid for this kindly of policy plan are lower and that is because probability of expiring policy without benefits are much higher. Such types of policies are merged with home loan insurance. Decreasing Term Insurance Example: when you purchase home loan from the bank, bank may ask you to buy such kind of insurance policy along with the home loan to protect the loan against any uncertainties. Few of the banks have made mandatory along with home loan whereas some banks allows customer as an option.

Advantages or Benefits of Term Insurance Plans:

• Term Insurance is one of the cheapest form of life insurance.

• This Insurance does not involve any investment plans or maturity schemes, It clearly says that it’s purely a death protection policy which makes this insurance simplest.

• Term insurance offers guaranteed lock-in rates from 1 to 35 years. Policyholder can purchase policy at affordable rate without change in premium price for lock-in years.

• With insurance you can flexibility to separate life insurance with your investments. It is highly recommended not to club investment with insurance. Practise followed largely in the world is “Buy Term and invest differences separately”.

Disadvantages or Drawbacks of Term Insurance Plan:

• Premium rates get increased after guaranteed lock-in period. If customer has 10 years level term policy then at the time of renewal premium rates will be changed.

• If you require insurance beyond the life expectancy rate then term insurance is not recommended way to cover your life.

• Mostly this insurance does not have any cash value upon maturity only policy with return of premium will payback premium paid as a cash value but if you are looking for good lump sum amount on maturity then term insurance is not worthwhile.

Exceptions of Term Insurance Policy:

“Term Insurance” does not cover deaths due to following reasons:

Many people are not aware of this fact that despite of all this benefits there are few limitations. Term insurance does not cover death due to terrorist attack, war or natural calamities such as flood / earthquake. This cause is added in insurance policies to protect company against huge claim settlements occurred at specific time. Perhaps sometimes it has been noticed that such claims are undertaken under humanitarian ground when Insurance Regulatory and Development Authority (IRDA) is approach by the nominee.