What you must know about term plans

By Guest |  22-08-16 | 
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A term insurance plan is a type of insurance coverage which is taken for a specified period. During this period, called the plan term, if the person whose life is insured dies, the sum assured is paid. The sum assured is the amount of cover which is chosen at the time of buying the policy.

The benefit under the plan is payable only if the person insured dies. If the plan completes the stipulated term and the person insured is alive, the plan matures. On maturity, no benefit is paid as the insured is alive.

What you need to know about term insurance plans:

  • Term plans are traditional insurance plans which are not linked to market returns and provide a fixed benefit.
  • These plans do not earn bonuses and are issued as non-participating plans.
  • Since these plans are designed for protection purposes, the tenure offered under these plans is usually long. A maximum of 30 or 35 years can be opted as the coverage term under term plans.
  • This is a pure protection insurance plan which provides coverage against the risk of death. Any other risk, like surviving till maturity, is not undertaken and no benefits are paid in case of such risks which are excluded.
  • Term insurance plans pay a lumpsum benefit in case of death (or maturity in case of return of premium plans). However, insurers have also launched monthly income term plans wherein the death benefit is paid in monthly instalments post death for a specified tenure. These plans aim to provide regular monthly incomes to the insured’s family for meeting their day-to-day expenses instead of a lump sum corpus. The plans also provide the nominee the option to withdraw the monthly benefits in lump sum. However, in this case, the lump sum amount paid would be the discounted value of the aggregate monthly benefits.

There are four broad variants of a term insurance plan.

1) Pure term plans

These plans provide only the death benefit when the insured dies within the chosen term of the plan. In case of survival till plan maturity, nothing is paid.

2) Return-of-premium plans

As the name suggests, these plans go one step further than pure term plans. The premiums paid during the plan tenure are returned back to the policyholder in case the plan matures. Therefore, those looking for term plans which provide a maturity benefit can opt for these plans. The death benefit is similar as in case of pure term plans.

3) Increasing term plans

Under these plans, the sum assured chosen at the commencement of the plan increases every year throughout the plan tenure. The rate of such increment is determined by the insurance company and is mentioned before-hand. The premiums remain same throughout the term even though the coverage increases. On death, the increased coverage at the time of death is paid. However, the plan has no maturity benefit.

4) Decreasing term plans

Opposite of increasing term plans, decreasing term plans decrease the sum assured every year by a fixed percentage. This rate is also pre-fixed. On death, the sum assured in the year of death is paid. On maturity, usually, the sum assured reduces down to zero and no maturity benefit is payable. These plans find application with loans issued by banks and financial institutions. The sum assured reflects the loan amount and the reduction usually reflects the EMI paid. The reduced sum assured reflects the outstanding balance of loan and the plan is issued with the objective of repaying the outstanding loan balance if the insured dies prematurely.

Source: Advisorkhoj.com

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Muthu Sivam
Sep 18 2017 06:05 AM
Dear Tapan ji,
The entire business model of Insurance is based on what is called "Pooling". To explain,
Let's say an Insurance company collects Rs. 5,000 term insurance premium p.a from 1,00,000 customers (= 50 Crore total premium amount) to insure each of their life say for a sum assured each of Rs. 5 Lakhs

But all 1,00,000 people will not die in that same year.

Let's say 0.7% (0.7% of 1,00,000 insured persons = 700 persons) of the people die (going by India's average "Death rate" statistics data).

So the company has to settle the sum assured of Rs. 5 Lakhs x 700 = Rs. 35 Crore

The company is left with a balance premium amount of Rs. 15 crore, which will not be returned to the insured, since it is a term (1 year) premium.

The company incurs certain expenditures to run their business, distribution and other costs and still stays profitable.

Usually Life Insurance claims are paid without major issues unless there is a clear case of fraud (impersonation), case of suicide, misrepresentation of facts at time of taking insurance (e.g., critical diseases) and certain other scenarios.

In fact, term insurance is the best way to get oneself insured because the insurance coverage one gets is the highest (in comparison to other plans) and also the premium is lowest.

To put it other way, let's say we buy an asset like a car or a motor cycle and we also have to take insurance for it. But do we expect to earn anything from the Premium paid for it? Definitely not. At the end of the term of 1 year, if there is no claim, we and the insurance company are both happy, and we pay premium next year to cover for potential risks. When this the case for a productive asset like car or motorbike, why should it be different for a human life which is supposed to the the most productive asset. Keep Insurance (for protection) separate from Investment to get best coverage and invest the balance funds in right investment assets with the help of an advisor.

Sethu, www.dhanayo.ga
tapan mohanta
Feb 12 2017 10:02 AM
i have a doubt regarding term plans, as they have to pay high sum assured so will they really pay when time comes, they will or may find weired excuses and faults. none has 100% claim settlement ratio. all they have to do is pay sum assured which they are not able to do. how can companies make profit if premium is so low...as their ads come: life cover at price of coffee a day???????????
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