Ch. 23: Types of Term Insurance Plans

Term insurance policies come in a lot of variants. And, each of these variants is unique, has its own set of features, and is designed to meet your specific needs. In this article, let’s take a look at some common types of term insurance policies available in the market.

Let’s dive right in!

Regular Pay Term Insurance

This is the most basic type of term insurance and is sold by every insurance company. Here, you are required to pay the premiums throughout the policy duration. The premium payment term under this plan will be equal to the policy tenure you choose.

Example:
Pratik, 25, buys a regular term plan with a sum assured of Rs. 1 Crore. He buys the plan for a duration of 50 years. And, he is required to pay a premium of Rs. 11,000 every year. This means that he’ll have to continue paying the premium of Rs. 11,000 for the next 50 years.

Limited Pay Term Insurance

As the name implies, under this option, you need to pay the premiums for a limited period of time. With this plan, you can get the premium payment liability off your chest in a few years compared to the policy tenure you opt for. So, you can complete your premium payments in quicker, larger instalments - and enjoy the coverage for the remaining policy duration.

Example:
Nishant, a 25-year-old, buys a limited pay term insurance with a cover amount of Rs. 2 Crore. He opts for a policy duration of 60 years, and a premium payment term of 15 years. This means that he’ll have to finish all the premium payments under his policy in the next 15 years. He will still be covered under the term plan for 60 years.

Single Pay Term Insurance

Under this type, you are required to pay the premium only once - at the time of purchase. And, then you and your family can enjoy the life cover for the tenure chosen.

Since you pay the premiums only once, you don’t need to worry about the payment due dates or the policy lapsing. These plans, however, can be much more expensive compared to regular or level-term insurance policies.

Example:
Rakhi decides to buy a single pay term insurance for a duration of 50 years. In this case, she’ll have to make the premium payment for the entire policy term at once, as a lump sum. And then, she and her family can enjoy the term coverage for the rest of the policy term.

Increasing Term Insurance

As you grow older, your financial responsibilities will most likely increase too. To meet these increasing responsibilities, and to keep up with the rising inflation, you should consider buying an increasing term insurance plan. This plan will ensure that your family is covered sufficiently, always.

Under this plan, your sum assured will keep on increasing gradually during the policy tenure. The sum assured will increase at predetermined rates until it reaches a maximum limit specified by the insurer.

Example:
Ayushi, 40, buys an increasing term plan with a sum assured of Rs. 50 Lakhs. She opts for a policy duration of 25 years. As per the terms and conditions, her policy sum assured will increase by 10% every year until a maximum increase of 2 times the base sum assured. Her cover will start increasing from the second policy year. Let’s see how her cover will increase with the help of the below table.

There will be no further increment in the sum assured from the 12th policy year. Because the maximum allowed increase is up to 1 Crore (2 times the base sum assured).

Decreasing Term Insurance

This plan is the exact opposite of the above plan. Under a decreasing term insurance plan, your sum assured will keep on decreasing once every 5 years by a specific percentage.

This plan is mostly purchased to clear debts or any loans you may have taken. Basically, if you have loans/ liabilities and pass away before settling them, the burden of repayment of these loans/liabilities will fall on your family’s shoulders. In order to avoid this, you can consider buying a decreasing term plan.

The cover amount under this plan will keep on reducing - as you repay your loan periodically. And in case you pass away while the plan is in effect and before the loan/liability is settled, the insurer will pay the claim amount to your family. They can use this money to repay the loan/liability.

Decreasing term insurance can be age specific as well. Meaning, say when you turn 60, the cover amount under the plan will reduce because you may not have any liabilities at that time and hence, you may not need the original base cover you purchased.

Example:
Ishaan buys a decreasing term insurance plan for a sum assured of Rs. 1 Crore and a duration of 60 years. Let’s assume that -

• The sum assured will start reducing after the first 5 policy years.
• The sum assured will reduce by 10% once every 5 years.
• The sum assured will be reduced up to 50% of the base policy cover.

Let’s see how the cover will decrease with the help of the below table.

So, this is how the sum assured under Ishaan’s policy will decrease.

Level Term Insurance

Under a Level Term Insurance Plan, the sum assured will remain constant throughout the policy period. It will neither increase nor decrease.

Example:
Saroj buys a Level Term Insurance Plan at the age of 30. She buys the plan with a cover amount of Rs. 5 Crores for a duration of 50 years. Since it is a Level Term Plan, the sum assured under her plan will remain the same throughout the policy period. If she passes away during the middle of the policy term, her family will receive a claim of Rs. 5 Crores.

Whole Life Term Insurance

These plans offer coverage for your entire lifetime, i.e., till 99 or 100 years of age. Since the life expectancy is much lower than that, these plans are a sure-shot way of leaving behind a financial legacy for your family.

Under this plan, the insurer will pay the sum assured to your nominee if you pass away during the policy tenure. And, there will be no payback in case you survive till 99 or 100 years of age.

Example:
Rajesh buys Rs. 1 Crore whole life term plan up to the age of 99 years. Let’s say he passes away at the age of 90 years. In this case, the insurance company will pay the claim amount of Rs. 1 Crore to his family.

Joint Life Term Insurance

In a joint life term insurance plan, both you and your spouse can be covered under one policy.

If you purchase a Joint Life Term Plan with your spouse, you will be the primary life assured and your spouse will be the secondary life assured. The cover amount for both you and your spouse will be separate. And, the cover amount of your spouse, i.e., the secondary life assured can either be the same as your cover amount - or it can be 50% or 25% of your cover amount. This will depend on the product and insurer you choose.

In case of the death of one spouse, the cover amount of that spouse will be paid to the surviving spouse. And in case the surviving spouse passes away during the policy term, the cover amount of that spouse will be paid to the nominee.

Example:
Jessica and Raj buy a joint life term insurance policy for a duration of 40 years. Jay’s cover amount is Rs. 2 Crores and Jessica’s cover amount is Rs. 1 Crore. In the 20th year of the policy, Raj passes away. So, the insurer will pay the claim of Rs. 2 Crores to Jessica. Now, in the 30th policy year, Jessica dies of a heart attack. In this case, the insurer will pay Rs. 1 Crore to the nominee, and the policy will terminate.

Term Return of Premium (TROP) Plan

All the term insurance variants we discussed above do not offer any maturity benefits. Meaning, if you survive the policy tenure, the insurance company won’t pay anything. These plans only offer a death benefit, i.e., a fixed sum of money if you pass away during the policy term.

Unlike the above options, a Term Return of Premium or TROP plan offers a death benefit and maturity benefit. So, if you pass away while the policy is active, your family will get the claim amount. And, if you survive till the end of the policy term, the insurer will pay back all the premiums (minus the taxes).

Example:
Nisha takes a TROP plan of Rs. 1 Crore with an annual premium of Rs. 25,000 (exclusive of tax) for 50 years. Now, if she passes away in the middle of the policy term, the insurer will pay Rs. 1 Crore to her nominee. However, if she survives the term of the policy, she will get back the premiums she paid, i.e. Rs. 12,50,000 (25,000 x 50).

Group Term Insurance

Group term insurance offers coverage to a large group of people under a single policy. This variant of term insurance is provided by employers to their employees, by banks to their account holders, and so on.

Generally, the insurer offers one master policy to the master policyholder, i.e., the employer, bank, or organisation. The master policyholder will choose the cover amount, features, and other customizations, and pay premiums. They can then issue the cover to all the employees/members of the group.

In case any employee/member passes away, their nominee will receive the death benefit, i.e., a fixed amount of money.

This brings us to the end of this article. Hope this article helped you gain enough clarity on the types of term insurance plans sold by insurers today. Before you decide which term plan to buy for your family, make sure you understand how it works - to avoid any issues later on.