Term insurance is the conventional, fundamental form of life insurance. It has a fixed period called tenure or term associated with it. It also has a fixed sum assured. If the insured person passes away during the term, the sum assured is paid to nominees.
Term insurance plans are of the following types.
1. Level Term Plans
These are plain vanilla term insurance plans. The sum assured is fixed throughout the term of the policy. It is paid out in case of the death of the insured person during the term.
2. Return of Premium Plans (TROP)
These plans have all the coverage of the level term plans. In addition to that, they have the benefit of the return of all premiums. This comes into effect if the insured person survives the term of the policy. All the premiums paid during the term of the plan are then returned to the insured.
3. Increasing Term Plans
In these plans, the insured person has the option of increasing the sum assured every year. The premiums paid every year remain the same, and these kinds of plans have higher premiums.
4. Decreasing Term Plans
In these plans, the sum assured decreases every year. Are you wondering: Why would anyone need a plan like that? Read along to find out.
Think of a situation where the insured has availed a home loan of a considerable amount. Every month, as he pays the EMIs, his liability keeps reducing. A decreasing term plan covers this decreasing liability.
Convertible Term Plans
In these plans, the insured person has the option of converting the policy type. This option is available at any time during the term of the policy.
Consider you have a convertible term plan of 20 years. Let’s say, after five years, you want to convert it to an endowment plan. With a convertible plan, you can do this. You can even convert it into a whole life insurance plan. Or any other type of plan as specified in the policy subject to terms and conditions.
Term Plans with Riders
These plans come with riders to cover situations like critical illness, permanent disability etc. You need to pay an additional extra premium for the riders.
Let’s say you have chosen the critical illness rider. During the policy term, you contract a critical illness. In this case, the future premiums may be waived off if the rider has come into effect.
Points to Consider
Are you interested in any of these types of term insurance plans? Consider these points before going ahead.
Are your nominees financially aware?
Term insurance plans are designed to disburse a lump sum to your nominees if you pass away. Your nominees may not be financially aware then. They may listen to advise from unreliable or unqualified sources. Based on this unsound advice, they may invest the lump sum in unregulated schemes. Like, they might invest in a chit fund based on friendly advice, for example.
To prevent this situation, it’s a good idea to ensure the financial awareness of your nominees.
Temptation to Overspend
Having access to a considerable amount within a short time is an interesting situation, and your nominees may be tempted to spend all of the sum assured on unsound purchases. Here too, your nominees’ financial literacy and education should be enhanced, and it will help to dissuade the nominee from overspending.
Conclusion
Term insurance aims to mitigate the financial stress on your dependents if you pass away too soon. Understand the types of term insurance and the points mentioned above to make an informed decision.
Read more about Busting Five Myths Around Term Life Insurance
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