A regular term insurance plan is a no-frills insurance plan that
provides coverage against a specific set of risks on payment of a pre-decided premium
amount. These plans offer no benefits upon maturity. Premium payments can be made
periodically or they can be paid at once (single pay). The options for insurance cover can
go as high as the insurer is willing to underwrite and the policy tenures can be as high as
20 years. When the policy matures, the insurance cover ceases, as does the need to pay
premiums for such a cover.
This is the most basic form of life insurance protection. Regular term
insurance also comes with low premiums and high sum assured. This ensures that the
policyholder can receive maximum benefits from the plan in a cost-effective manner.
A convertible term plan allows the policyholder to convert his/her
policy into a permanent one during the policy tenure. Some insurers provide this as an
additional benefit rider while others offer the same as a standalone plan. As far as the
terms and conditions have been met, converting a term life policy into a permanent policy
should not be a difficult process.
- Even before a policyholder converts the term insurance into whole-life insurance,
the policy will be more expensive. The coverage offered by a standard term insurance
policy and that by a convertible policy may be the same. However, the convertible
insurance plan will have higher premiums, owing to the built-in cost attributed to
the conversion facility.
- Another advantage of a convertible term insurance plan is that the life assured is
not usually required to appear for a medical examination while switching the plan
from term to permanent. This is particularly useful because if the life assured’s
health has waned after buying the convertible plan, he/she will still be able to
avail whole life coverage that would not have been possible otherwise.
- If the policyholder pays all premiums on time he/she can keep the policy in-force
with the option of conversion later on in life.
- You should buy a convertible policy now if you are unable to afford whole life
insurance. In the future even if you are able to buy whole life insurance, your
health may disqualify you from doing so. In effect, you choose the affordable
insurance now while also creating a path to the lifetime option in case your
insurance needs and health condition changes over time.
- When buying convertible insurance make sure that you are aware of the time frame
within which you should convert the plan. You should keep a close eye on this aspect
and also on the investment part of the plan.
- When you have a convertible term insurance policy, every year that you wait to
convert will make the conversion rate go up by 10%-15%. This is because you will be
moving up into higher rate bands as you grow older. If you are sure that you will be
going for a conversion, it is better that you do it while you are young and in a low
rate band.
While buying term insurance plans, you may have come across schemes that
are “renewable”. There is a misconception that the two are synonymous. The fact is that
renewable and convertible policies are two different products.
If a policy is referred to as being renewable it means that the plan can
be extended even after the end of the term. The premiums for renewal of the policy may
however be much higher than the original premium. On the other hand a convertible policy
provides you the ability to switch from term insurance for a specific duration to whole life
insurance. Renewable plans usually do not offer this option.
TROP plans are standard term life insurance plans with a slight
variation in the method of providing survival benefits. On survival, policyholders are
returned the total amount of premiums paid by them during the policy tenure, excluding tax.
Such a method ensures that the money spent on the policy is returned to you after a specific
interval.
- Just like a regular insurance plan, a TROP offers a refund of the premium upon the
policy’s maturity, provided that the policy holder survives till that date.
- A TROP plan generally allows policyholders to add riders or benefits to their
existing plans to increase the coverage.
- TROP plans have a slightly higher premium amount compared to regular term insurance
due to the premium repayment facility.
- Term Return of Premium plans offer you tax benefits on the premiums paid, under
Section 80C of the Income Tax Act. These plans also enable you to enjoy tax benefits
on the payouts from the policy under Section 10(10D).
- Some insurers offer returnable TROP plans. This means that if the policyholder opts
to discontinue the premium payment and return the plan, the premiums that have been
paid till date will be reversed. However, there will be deductions pertaining to
medical examination costs and stamp duty charges. You should discuss this facility
with your insurance advisor before investing in a TROP plan.
- The policyholder has the option to stop paying premiums towards a ROP plan after a
predefined duration, usually 3 years. The policy will then move into paid-up status.
The death and maturity benefits in this case will be reduced by a ratio of total
premiums paid to the total premiums payable under the plan.
There have been debates on the returns offered by TROP plans. There is a
general belief that TROP policies have inflated premiums with respect to the survival
benefits offered. Many compare TROP schemes to fixed deposits as well.
It is understood that fixed deposits (FDs) yield higher returns in
comparison to TROP plans. While TROP policies pay back the full premium as survival benefit,
there are no interests or other incentives offered. On the other hand, an FD account returns
the principal amount and compounded interest at maturity, which is far higher than the
survival benefit under a TROP plan.
But the vital life insurance coverage that TROP policies provide the
life assured should not be ignored.
The insurance market is flooded with various types of policies that it
often becomes difficult for the buyer to choose the best suited plan. Decreasing and
increasing insurance policies are two of the commonly used terms in the insurance realm.
Let’s take a look at the features and benefits of the aforementioned policies:
Decreasing Term Insurance: In this type of policy, the sum
assured on death as well as the premium decreases at a certain rate throughout the policy
term. Such plans are generally offered by financial institutions to insure the property held
as collateral against the loan offered. It is an additional safety component which ensures
that the bank will get back the amount released as loan, in case of worst scenario. The
duration of the policy term can vary between 1 and 30 years.
The essence of decreasing term insurance is that a person’s requirement
for high insurance coverage decreases with age, as certain liabilities do not exist beyond a
point. Decreasing term insurance plans are not suitable for individuals who have no other
form of life coverage. If you buy only one life insurance package, it should be a pure term
insurance policy, as it would offer you a death benefit throughout the tenure.
While the main advantage of choosing decreasing term insurance is that
it can be used for personal asset protection, small businesses also use these plans to
insure indebtedness for startup expenses or operational costs.
Increasing Term Insurance: Under increasing term insurance plans,
the insurance coverage increases at specified durations when the policy is in full force. It
evaluates risks on par with the rising costs at any given time in the future and compensates
accordingly. The cover usually keeps increasing till the time it attains a value which is
1.5 times higher than the original cover.
- Increasing term life insurance policies are configured to offer respite from
inflation. It also ensures that the death benefit is substantial when it is finally
paid out to the nominee.
- One of the main disadvantages of the increasing term insurance plan is that the
premium increases according to the benefit. Hence, these policies get more expensive
over time.
- Increasing term insurance is less common than other forms of term insurance.
- These plans are particularly suitable for couples who plan to have a child in the
near future and would like to save up for the same.
As the name suggests, joint term insurance plans are those schemes
which allow the person insured to cover his/her spouse under the same policy. It is a
comprehensive financial protection solution with multiple benefits for couples. It basically
ensures that the family equilibrium remains intact during hardships, or in the worst case,
during the absence of one of the two or both. These policies are well suited for married
couples with dependent children.
- Some joint life plans pay out on the basis of the first claim. This implies that if
one of the insured members die, the sum assured is paid out and the policy ends
immediately.
- Certain joint life insurance plans offer payment at the death of each insured
member.
- Some joint life policies offer payout to the surviving member at the first death.
The surviving member also receives a regular payout in the form of an income for a
fixed duration.
- Joint-life term insurance plans offer tax benefits on premiums paid and payouts
received, under Section 80C and 10(10D) respectively.
- Some plans provide additional payments if the death was caused in an accident.
In-built terminal illness coverage is also offered by some plan
If you and your spouse are looking to buy term insurance and are
confused about the product that you should buy, you can go through this checklist to
identify the right plan for you:
- A joint-life cover will provide insurance for both spouses under the same terms and
conditions. On the other hand, if you choose to purchase separate individual term
plans, the policy terms and conditions and cost can be selected by each spouse on
the basis of his/her insurance needs.
- Suppose you purchase a joint-life policy with a single death payout. In the
unfortunate
event of an accident in which you and your spouse face death, the policy will only
pay a
single death benefit to your nominee. However, if you both were insured under
individual
term insurance plans, then the nominee would receive two separate death benefits.
There is a
significant difference between both options on the financial front.
- After the first death benefit payment, the coverage under some joint-life term plans
terminates.
This leaves the surviving spouse without insurance coverage. Also, purchase of
insurance later
in life may cost more due to the age of the surviving member or him/her having
developed health
issues. This problem will not crop up if individual term plans were taken.
- In the case of a joint policy, if the couple chooses to get divorced, complications
would
arise in
the plan coverage and premium payments. This issue is avoided if term plans were
taken.
- The premium for joint-life term plans are usually lesser than that for individual
policies. So,
if you
are on a tight budget, it is advisable to take joint life coverage. Moreover, the
ease of policy
management and simple documentation are additional factors that make joint-life
plans an
attractive
option.