Although a term insurance plan provides financial security to a family after the demise of a policyholder, many people avoid it as they think it will gobble up their hard-earned money. After all, it pays only when a policyholder dies, but if he survives the term, nothing is paid back. But recently, term insurance plans have got a new lease of life. Insurers have come out with many other variants of term insurance which enrich the landscape of pure term insurance policies. Some of them are:
1. Term plans with monthly income: When the insured passes away, insurance companies pay a lump-sum amount to the beneficiary. If this lump sum is used prudently, it could be useful in accomplishing pre-determined goals. However, if the family hasthe low financial know-how, the lump sum amount can be fritted away in wasteful expenditure. To avoid this issue, insurance companies have started offering term plans with staggered payments. It means, in the event of the death of the policyholder, a certain amount of money would be paid up-front, say 10% of the sum assured, and the balance amount in monthly investments over 10 or 15 years. In such a situation, the consistent income will help a family to lead a financially secured life. It is a plan for people whose family members are not financially savvy. Also, if your kids are small, you can opt for this policy which will take care of your children school fees, household expenditure, etc.
2. Increasing life cover: Our needs and responsibilities change with time, and it is imperative to buy a cover that should match those responsibilities. Various term plans offer the flexibility to increase the level of protection at different life-stages, such as marriage, and childbirth. For instance, ICICI Pru iProtectSmart offers you an option to increase sum assured by 50% on marriage. It is a very useful feature as one doesn’t need to look around for another policy whenever there is an increase in financial liabilities. This plan suits to young people who currently have no major financial liabilities. Once liabilities start adding up, they can increase their coverage without buying a new policy.
3. Decreasing term plan: This is a cover which decreases at a predetermined rate, say 5% or 10%, over the period. The core idea behind decreasing term plan is that a person’s financial liabilities decrease with age. For instance, SBI Life-Saral Shield is a pure term insurance plan which comes with a decreasing term assurance feature. Mainly, this type of plan is used for loan or mortgage protection. At the time of taking a loan, you can opt for this plan option. In the future, when you will repay your loans and financial liabilities, your coverage will get decreased accordingly.
4. Increasing income: With inflation, our expenses also increase. A sum assured of Rs 1 crore may look huge today, but there is a high probability that the same amount might not be sufficient in the next 10 or 20 years. To take care of this concern, insurers offer a term plan where the insurance cover increases at a predetermined rate. The concept of increasing income is based on the rising inflation rate and can be considered by every insurance applicant to offset the inflation effect.
5. Return of premium: It is a variant of term insurance in which the insurance company will return the premium paid in case the insured survives the entire tenure. Even among term plans with return of premium (TROP) option, there are certain riders and add-ons that can be availed. Some insurers offer a ‘mid-term’ benefit in which the insurer pays 40% of the premium paid till date if the policyholder survives half of the policy’s tenure.
If you’re looking for a plan in which you don’t end up empty-handed after the end of the policy tenure and in fact, recover the cost of the plan, a TROP is a good choice for you. However, TROP policies are costly as compared to simple term insurance plans. If premiums of TROP policies are invested in some other investment options, you will get a high return. Let’s understand it with the help of an example.
Rahul, a 30-year old, non-smoker, decides to buy Rs 1core coverage under Max Life’s Premium return term insurance plan for 30 years. The premium paying term is 11 years and the premium paying mode is annual. In this case, Rahul’s total annual premium would be Rs 1,09,000/annum (including service tax and cess). In the case of survival, he will get Rs11,99,000. On the other hand, his friend Shyamdecides to go for ICICI Pru iProtect Smart for the same coverage and tenure. In this case, Shyam’s total premium would be Rs 8906/annum. There is a huge difference in the premium of Rahul and Shyam.
If Rahul also buys ICICI Pru iProtect Smart and pays Rs 8906 out of 1,09,000, he can invest the remaining amount. If he invests Rs 1 lakh/annually in an investment option at 8% interest rate for 20 years, he would be able to get Rs 49,42,292, which is more than the survival benefit of Max Life’s TROP plan.
So, it is advised to ignore TROP plans and go for plain term insurance and use the extra money to invest in any other option.
6. Critical illness benefit: When a critical illness strikes, it puts an enormous financial burden on the family. To deal with a situation, various insurers offer critical illness benefit along with term plans. This benefit is paid out if the insured contracts any of the critical ailments covered under the policy document. For instance, ICICI Pru iProtect offers critical illness benefit as an income replacement on the diagnosis of critical ailments, such as cancer, chronic lung disease, medullary cystic disease, and aplastic anemia. The rising cases of critical illnesses in India have made it important to opt for critical illness benefit for every individual. Also, if you have a family history of critical ailments, it becomes important to go for a critical illness coveralong with the term insurance.
7. Accidental death benefit: If a policyholder dies due to an accident, the nominee is entitled to get an additional amount. Some policies offer it as an inbuilt feature while others give it as a rider. Indian roads have become dangerous. In fact, in every hour, 16 people died in road accidents in 2014. Every insurance applicant should opt for the accidental death benefit to offer extra protection to their family members.
8. Partial and permanent disability rider: Term insurance financially secures your family in the event of your death. But what if you become permanently physically challenged and lose your source of income? To avoid this situation, it is worthwhile to opt for this rider.
In the case of disability of the policyholder, the insurer pays a certain pre-approved percentage of the sum assured to replace the income. Also, in the case of permanent disability due to an accident, all future premiums under the policy are waived off. It means, without paying any premium, you will continue to get coverage.
Of course, it is certain that you will die, but you don’t know when. It could be today, tomorrow or 30 years down the line, but it will happen. Wouldn’t it be great to know that your loved ones won’t face any financial hardship in your absence? When term insurance plans are bundled with so many features, there is no point in keeping it out from your financial portfolio.
The views presented in this article belong to the author, and do not necessarily reflect the opinions of You & I.