Term Insurance

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What is Term Insurance

Term insurance is essentially a form of life insurance and is also referred to as term life insurance, and term assurance. It provides coverage at a specified rate and the facility is available only for a certain amount of time or the term period of the said plan.

Once the period comes to an end there is no guarantee that coverage will be provided at the rate when the policy was on. To ensure that this does not happen the policyholder can relinquish the plan or renew it with various conditions and payment terms. If the insured passes away during the plan the death benefit is paid to the beneficiary.

Term insurance is said to be the most inexpensive method to buy a good amount of death benefit on any coverage amount. However, this can be said only for a certain period of time.

Difference with other forms of life insurance

Term life insurance is different from other forms of permanent life insurance like the whole life plans, variable universal life plans, and universal life plans. These plans normally provide an assured sum of coverage and charge a definite amount of premiums for as long as the insurer lives.

Term assurance is not used normally for areas like charitable donation plans or estate planning requirements but only for satisfying income replacing requirements. The similarity between term insurance and other forms of insurance is that in term insurance too the claims are satisfied if premium payment is properly done and if the contract tenure is yet to expire.

Benefits of term life insurance

Term insurance is basically a form of death benefit it is basically used to cover the financial duties of the insured or the nominated beneficiaries. Some of the areas where these policies can be beneficial may be mentioned as below:
  • Consumer debt
  • Funeral expenses
  • Dependent care
  • Mortgages
  • Education of dependents especially in the higher stages
Term life insurance is normally preferred compared to other life insurance plans as, over a definite period of time, it is considered to be a less expensive option. Leading financial experts have also stated its use as an alternate savings medium till the insured can use their own savings in banks for example.

Financial planners feel that the term plans are the best as they provide a high level of coverage for lesser prices. The premiums of these policies are almost negligible compared to endowment plans, ULIPs, or money back policies.

One of the major reasons behind the high returns is the fact that these do not have any investment components. The whole premium is used to cover the risks.

Types of term assurance plans

Term assurance can be classified broadly into two categories – annual renewable term policies, and the level term plans.

Annual renewable term policies

The annual renewable plans are regarded the most uncomplicated form in this type of life insurance. These policies are basically valid for a one year period. In these policies the death benefit is paid if the insured passes away within the specified term period.

However, there is zero benefit in case the insured passes away a day or more after the policy has lapsed. The premium to be paid is decided on the basis of the assumed probability of the insured within the one year period.

Normally it is assumed that the chances of a person dying within a year’s span are less. So the insurers normally provide such policies. However, these policies are not availed on a regular basis.

One of the major challenges when it comes to insuring these policies is for the insured to prove that they can be insured again. For example the insured might have contracted a terminal ailment when the policy on but has survived even after the policy has lapsed.

However, the insurer will still regard the concerned person unfit for a policy renewal as a result of the illness. There are a few policies that offer assured reinsurability as an added feature.

Level term plans

The level term life insurance plans are more common than the annual renewable term plans. These plans are basically supposed to be the same throughout the policy period. Normally plans with 10, 20, 15, and 30 year term periods are available.

The cost of these plans is decided on the basis of summed cost of the annual renewable term rates of each year. The insurers also use other factors in this computation like the time value of money. This implies that the premium is directly proportional to the term period of the plan as the older, and thus costlier, periods are taken into view.

Majority of these plans offer renewal features at a maximum assured rate provided the insured wants to extend the policy term period. However, these policies do not always guarantee renewal and it is up to the insured to check if there is a clause of showing proof of renewability in their policy contracts.

This clause comes into play whenever the insured suffers a major ailment during the policy term period and this reduces their reinsurability as far as the insurers are concerned.

Popularity of term insurance plans

The popularity of term insurance plans has gone up of late. The CEO and Managing Director of HDFC Life, Amitabh Chaudhry, has stated that the premium rates are lesser now and the companies are also much more proactive when it comes to marketing the term life plans.

Buying insurance through internet has become much simpler and all these factors, according to him, have contributed to the present scenario. The insurer has recently launched its Click2Protect plan earlier in 2012.

Aviva Life Insurance, which came out with the i-Life plan during May 2011, has already sold at least 18 thousand plans since then. Aegon Religare Life Insurance has also been able to issue almost 25 thousand iTerm policies.

How to choose a term life insurance plan?

The first factor to be considered while buying a term plan is the cover amount needed. Ideally it should cover the following:
  • Basic expenses of the family
  • Liabilities such as loans
  • Major expenditure such as marriage of wards
The insured should also decide the time period till when he requires coverage. Ideally this should be the time when he or she wants to keep working. The chief actuary of Kotak Life Insurance, Andrew Cartwright, says that nowadays people are looking to be employed even after 60.

People are also getting married late and are then having children. All this means that their duties often stretch after they are 60. As per experts coverage is necessary till one is 65 years but the decision may vary as per circumstances.

Experts normally advise against taking short term policies of 15-20 years which come to an end when the insured are 40 years old. The premiums in these policies are fairly low as they are insured when the risk factor is less.

When someone tries to take a new policy at 40 years of age the premiums go up at an alarming rate – proposers might also be denied their desired cover if their health has not been good enough.

It is better to go for a plan where there is flexibility in choosing the term period. It is always advisable to go for customizable plans that can be tailored to suit the proposer’s requirements.

Experts also feel that is better to go for plans that factor in inflation in their coverage policies – ones where the coverage can be increased if the inflation rate goes up.

Who should go for term insurance?

A term life plan should ideally, according to investment experts, be taken when the proposer is young, preferably in his late twenties and starting out on a job. The younger the insured the lesser the premium is. People interested in buying a term plan should also look at longer term periods so that they can be covered for a longer period of time.

Top term assurance plans

Following are the leading term insurance plans being offered in India:

Insurer Plan name
HDFC Life Click2Protect Online Protection Plan Term Assurance
Kotak Life Insurance Kotak Term Plan/Kotak Preferred Term
ICICI Prudential Life Insurance ICICI Pru iCare Pure Protect
ING Vysya Life Insurance ING Term Life ING Term
MetLife Met Protect Suraksha Plus
AEGON RELIGARE Life Insurance iTerm Level Term Plan
SBI Life Insurance Smart Shield
Max Life Platinum Protect
Bharti AXA Elite Secure
Future Generali Smart Life
Aviva Life Shield Plus
Bajaj Allianz New Risk Care II
Birla Sun Life BSLI Term Plan
LIC Amulya Jeevan-I
Reliance Life Insurance Term Plan

Last Updated on 29 September 2012