Term insurance is the type of life insurance policy that offers coverage for a specific ‘term’ or period of time. A death benefit is paid in case the policyholder dies while the policy remains active or is in force. Unlike the permanent insurance policies, term insurance plans have no cash value.
These insurance policies can be used as a long term savings plan, and they even come in handy when people need a particular amount for a shorter duration. Whether you need term insurance for a longer or shorter duration, following are facts that you must be aware of before choosing a plan.
Six Common Types of Term Insurance Policies
Given below are the six common types of term insurance policies that you can look into when trying to select the right plan.
1. Level Term Plans
Level term plans are the simplest ones among the term insurance policies. In this case, the sum assured remains unchanged during the tenure and the benefits are offered to the nominee upon the policyholder’s death.
2. Return Of Premium Plans
Unlike the level term plans, these plans come with maturity benefits. In return of premium policies, the premiums are offered to the policyholder if they survive until the policy matures.
3. Increasing Term Plans
In these types of term plans, one can choose to increase the policy’s sum assured at an annual frequency, while the plan is active. The premiums are kept the same. Naturally, the premiums of this particular plan will not be the same as that of the level term plans.
4. Decreasing Term Plans
The decreasing term plans are the opposite of increasing term plans. In these policies, the sum assured gets decreased on a yearly basis in order to match up to the policyholder’s decreasing insurance requirements.
Most people opt for these plans when they have taken a major personal loan or home loan, and are paying an EMI (Equated Monthly Installment) for it. The sum assured goes on decreasing as per a predetermined frequency, as and how the EMIs get paid and the total loan amount goes on decreasing.
5. Convertible Term Plans
This is a plan offered by some insurers whereby the term policy comes with the option to have it converted into some other insurance plan of your preference, at a later date. For instance, say you have taken a term plan for twenty-five years. You might get the option to convert this plan into an endowment plan, whole life insurance plan, or some other plan of your choice, after five years.
6. Term Plans With Riders
Some term insurance policies let you add riders, such as disability cover, accidental death cover, or critical illness cover, by paying an additional premium. In case you choose to take any ride and choose premium waiver benefits, you will not have to pay the future premiums, in case any of the eventualities for which you took the rider actually occurs.
Four Factors to Consider in Choosing a Term Insurance Policy
It would be easier for you to choose the right term insurance policy if you keep the following factors in mind.
1. Decide On The Cover Amount
Your cover amount depends on six major factors, and they are:
- Financial responsibilities
- Future financial requirements
- Basic expenses as per lifestyle habits
- Loans being serviced at present
- Inflation and increasing costs
Ideally, the younger you are, the higher your cover amount should be. For instance, at 25-35 years, it should be around twenty times the annual income.
2. Determining The Policy Period
Similar to your cover amount, the duration of your policy period should also be inversely proportional to your age. So, it is advisable to have a policy period of forty years, thirty years, twenty years, and ten years in your twenties, thirties, forties, and fifties, respectively.
3. Find The Right Payout Options
The premium amount of the policy depends on your chosen payout option. You can go for regular monthly income payouts or a lump sum payout (as per your insurance plan). The payout option has to be selected as per your needs and feasibility because this will impact your insurance premium.
4. Choose The Right Insurer
Different insurance companies have different types of insurance plans on offer. It is crucial to select the insurance partner whose policies suit you the best. Carry out some basic checks while deciding on the insurer. You need to check for the solvency ratio, claim settlement ratio, market reputation, and financial background before relying on an insurer.
The Bottom Line
Securing your family’s future financially is certainly one of your foremost priorities, and term plans can help you do exactly that. So, keep the advice given above in mind, and don’t wait too long to get the right insurance plan in your name.