An emergency comes unannounced, and it may hamper the emotional and financial stability of your loved ones. While it is difficult to ensure their emotional well-being, you can provide them with financial security by investing in a term insurance plan.
Term insurance is a simple and affordable life insurance policy. It is a protection plan that offers financial compensation to your beneficiaries in your absence. A term plan is active for a specified period known as the policy term. It pays the benefits to your nominees in case of an unfortunate event during the policy term.
Types of term insurance plans
Primarily, there are four kinds of term policies. These include:
- Level term plans
In these plans, the sum assured and premium are constant during the entire policy term. When you buy a level term plan at a young age, the premium is lower, and you can pay the same amount throughout the tenure. Thus, you can procure higher coverage at a lower cost.
- Term insurance with return of premium (TROP)
A regular term plan does not offer any survival benefits. In comparison, TROP plans repay the entire premium if you survive the policy term. For example, assume you avail of term coverage of INR 50 lakh for 20 years at an annual premium of INR 15,000. In case of an unfortunate event during this period, your beneficiaries receive the sum assured of INR 50 lakh. If you survive the policy term, the insurer repays INR 3 lakh (15,000*20) at the end of 20 years.
- Increasing term insurance
With this type of life term insurance plan, the sum assured increases periodically without any rise in the premium. Insurers may define the maximum sum assured limit beyond which the policy benefits do not increase. These plans are beneficial to meet inflation and deal with life-changing situations. Often, the premium for increasing term plans is higher than a regular policy.
- Decreasing term insurance
The sum assured reduces at regular intervals during the policy term; however, the premium remains constant. The purpose of these policies is to seek protection against debts like a home loan, which decreases as you pay the Equated Monthly Installment (EMI). The sum assured becomes zero at the end of the policy term, and premiums on such plans are lower as compared to other types of term plans.
Tips to choose the right term policy
Selecting a term plan may be confusing. Here are three tips to help you make the correct choice:
- Determine your requirements
Term plans primarily cover the financial needs of your loved ones during your absence. Therefore, you need to identify your needs, such as present earnings, number of dependents, current lifestyle, and existing debts and other liabilities. This will help you calculate the coverage required to ensure your family’s financial stability. Ideally, your coverage must be 20 times your annual income.
- Opt for the appropriate riders
Term plans offer several add-ons, such as accidental benefits, waiver of premium, disability cover, and loss of income at an additional premium. They may also cover critical illnesses, such as cancer, paralysis, and heart attack, among others. Analyze which riders you may require and choose the necessary ones for comprehensive coverage.
- Decide a suitable tenure
The primary objective of a term plan is to make sure that your family does not face financial difficulties during your absence. To determine the plan’s duration, you must consider your present age, financial responsibilities, life goals, and after how many years you wish to retire. The entry age is a crucial determinant of the premium, and buying earlier helps save a significant amount during the policy term.
Now that you understand, what a term plan is, get one today to ensure the financial protection of your loved ones.