The concept of term insurance is fairly simple. In return for the premiums paid (which are low) the insurer promises to pay the Sum Assured in the event of death of the policyholder. However, there is a catch. Term Assurance Policies (except Return of Premium plans) have no Maturity Benefit so when the policy matures and the policyholder is alive, he gets nothing. Term assurance policies come in four varieties to suit different customer needs.
Level Term Plan
This is the simplest and the purest version of the plan. It is sometimes called Pure Term Plan as well. Under the Level Term Plan, the policyholder chooses a term, say 25 or 30 years and pays equated annual premiums throughout the term (it may be a single premium plan too). The SA remains constant and is paid only in case of death of the policyholder during the term of the policy.
The level term plan is a boon for low income class people who cannot spare huge premiums for an optimum life cover. Under this plan, with a very low premium, a decent amount of cover can be afforded. Moreover, being the cheapest plan, it can be used to supplement other insurance products like ULIPs giving the benefit of both good investment and optimum cover
Return of Premium Plan (ROP)
When we say term plan what hits our mind first is no Maturity Benefit. In spite of the cheap premium structure, if the policyholder survives the term of the plan, he feels cheated when he gets no returns. Most of the investors are averse to this idea and seek tangible returns on their investment. To cater to this requirement, return of premium version of the term plan was launched. As the name suggests, under this version, the premiums paid are returned to the policyholder if he survives the term of the plan. Some insurers even pay a certain extra amount (a % of either SA or premiums paid) in addition to the return of premiums. The amount of premium is higher under this plan due to the returns guaranteed.
Increasing Term Plan
The SA under the increasing Term Plan increases every year by a fixed percentage (say, 5 or 10%) mentioned at the start of the plan. There is a cap to this increment which is generally up to 200% of the original SA. The premiums paid are highest for this version of the plan though they remain constant throughout the term. The premium is high to provide for the increasing cover. Another good feature of this plan is the health condition is irrelevant during the term of the plan. Health check-up is required only at the start of the plan and the SA increases irrespective of any deterioration in health of the policyholder.
The increasing term plan helps to hedge against inflation. This is developed with a view to increase the real value of money to the investors so that when a claim is eventually paid, its worth is in tandem with the inflated cost of goods at that time. Moreover, an increasing term plan taken in the earlier years of your life helps in later years when you have more dependants and thus need to meet more responsibilities. So, this plan is essentially developed to adapt to your changing circumstances.
Decreasing Term Plan
Also called Mortgage Redemption Plans; these plans are a complete opposite to Increasing Plans. Here the SA decreases every year by a predetermined percentage until it becomes zero on maturity. The premiums are low due to decreasing coverage given.
These plans are basically developed to take care of the outstanding amount of loans. These are generally taken along with loans and as you pay back your loans, the cover also decreases by the same amount.
The basic idea is that in case of death of the policyholder (who takes the loan), the loan issuing organization does not lose. Even the family members are spared the burden of loan repayment as any outstanding amount is taken care of by insurance claim.
Written By: Deepak Yohannan
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal
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