Life may be great for the most part, but at some point, uncertainties and unexpected events may happen. They may be sudden job losses, pay cuts, or even accidents. And almost always, such incidents come with financial difficulties. This is particularly true when there is sudden demise of the primary breadwinner in a family. Loss of the primary source of income can prevent the surviving members of a family from achieving their life goals as planned. In situations like these, a term insurance plan can be the saving grace that is needed.
Let us take a closer look at what this financial product is.
What is term insurance?
Term insurance is a type of life insurance where the insurance company offers the insured person a pure life cover. In exchange for this life cover, the insured person pays term insurance premium to the insurer. As is evident from the name, the cover provided by a term insurance plan is valid for a specified period of time. This is known as the term of the policy.
If the insured person passes away during the term of the policy, the insurer pays a death benefit to the nominees or the legal heirs of the insured person. Term insurance plans are purely protective life covers, meaning that if the insured person survives the term of the policy, the insurer is not liable to pay any amount to the insured person.
Since term insurance plans offer a pure life cover, they are typically much less expensive than traditional life insurance policies like endowment plans and whole life insurance.
What is Single premium term insurance?
As the name itself makes it clear, a single premium term insurance plan is a type of term insurance where the policyholder is required to make a one-time premium only once, up front, in exchange for a life cover from the insurance company. The primary feature of this type of term insurance is that it eliminates the need to pay regular and periodic premium payments, while still allowing the insured person to enjoy a life cover.
Benefits of a single premium term plan
• No chances of policy lapses
With a single premium term plan, policyholders do not need to keep track of regular due dates for paying the premium periodically. This eliminates the chances of policy lapses, since there are no chances of any term insurance premium payments being missed.
• Suitable for people with irregular incomes
Single premium term insurance plans are preferred by people with irregular incomes, like self-employed people or entrepreneurs, since they can simply purchase the policy and relax without worrying about the policy lapsing.
• Good for people with a lump sum amount
In case someone looking to buy term insurance possesses a lump sum amount owing to a bonus or an inheritance, a single premium term plan can be the a preferred kind of life cover to purchase. It helps put that money to good use.
Types of term insurance plans in India
Depending on the term insurance premium charged and the coverage offered, there are many different types of term insurance plans in India. Each of them has its own defining features and offers its own distinct benefits. Broadly speaking, term insurance plans can be any one of the following four types.
1. Level term insurance
Level term insurance, being the most commonly availed types of term plans in India, are characterized by fixed premiums throughout the term of the policy. The sum assured by the insurer also remains fixed in level term insurance. Typically, when people purchase a level term policy at a younger age, there are higher chances that the premium charged will be lower.
Benefits of a level term plan
• Lower premiums
Level term insurance plans generally come with lower premiums that are more affordable. This is particularly true if policyholders purchase the term plans when they are younger and healthier.
• High coverage
Level term plans also offer high life covers for affordable term insurance premiums. A high life cover can prove to be very useful in case of the policyholder’s demise, because the surviving members of the family can remain on track and achieve their life goals.
• Fixed premiums that make financial planning easier
Since the premium amounts remain fixed throughout the term of the policy, it is easier for policyholders to plan their finances accurately. It can also help potential buyers choose a term policy that fits into their budget.
2. Increasing term insurance
An increasing term insurance plan is a type of term plan where the sum assured increases every year by a predefined amount. This increase can be re-defined or chosen as per the product terms and conditions
Benefits of an increasing term insurance plan
• Keeps life goals in place
An increasing term insurance plan helps the beneficiaries meet their life goals on time, since it accounts for rising costs and changing financial goals. It allows the beneficiaries to live the life they planned no matter what the circumstances may be.
• Hedges against inflation
Inflation is a very real phenomenon, and increasing term plans help the beneficiaries of policyholders meet the rising costs in the future because the sum assured increases on a year-on-year basis.
• Helps achieve life goals based on life stages
As one progresses along the timeline of life, the life goals keep changing. From being single, to married, to becoming a parent – each stage brings along a new goal. Increasing amounts of the sum assured helps in making it possible to achieve the goals no matter what stage the policyholder’s nominees are in.
3. Decreasing term insurance
A decreasing term insurance plan is developed on the assumption that with age, an individual’s liabilities tend to decrease. So, the need for insurance coverage also tends to correspondingly reduce. As a result, the sum assured in a decreasing term insurance plan decreases across the term on a predetermined basis. The term insurance premium, however, tends to remain constant.
Benefits of a decreasing term insurance plan
• Highly affordable
Decreasing term plans are highly affordable, given that the sum assured decreases over the term of the plan. So, these plans are preferred by people who wish to reduce their insurance budget over the years.
• Optimal coverage
Some individuals may repay their liabilities earlier in life. So, even in case something untoward happens later in life, the surviving family members may not be left with heavy debts to repay. In such cases, decreasing term plans offer optimal coverage.
4. Term insurance with Return of Premium (TROP)
Unlike regular term plans, TROP provides benefits to the insured person if they survive the term of the policy. In case of survival, the premiums paid are returned to the insured person, subject to the deduction of applicable taxes.
Benefits of Term insurance with Return of Premium
• Return of premium
The most significant benefit of this type of plan is that it includes a refund of the premium at maturity. If the insured person outlives the term of the policy, the total premiums paid for the TROP are returned by the insurer.
• Assured returns
While term plans generally do not offer any returns, TROPs come with the element of assured return of premium. Although there’s no element of profit involved, the return of premium is, at the very least, guaranteed.
In addition to the individual benefits of these different types of term insurance plans, they all offer one common advantage - the term insurance tax benefits. A term insurance plan provides tax benefits under section 80C and section 10(10D) of the Income Tax Act 1961. As per section 80C, the premium that you pay for your term insurance plan can be deducted from your total income. As a result, this brings down your taxable income, thereby also reducing your tax liability. You can claim up to Rs. 1,50,000 of your term insurance premiums as a deduction under this section. Under section 10(10D) of the Income Tax act, 1961 ,the benefits obtained from a term insurance plan are also exempt from tax, provided the sum assured is at least 10 times the annual premium paid. The above mentioned tax benefits are subject to provisions of Income Tax Act, 1961, as amended from time to time. Before purchasing a term plan, it is ideal to consider the features and benefits of all the different types before signing the dotted line.