Term Insurance

Term insurance can be defined as a type of insurance that is availed for a certain period or a fixed term (number of years). The basic differentiating feature of term insurance is that unlike other types of life insurance policies, a term insurance policy is less expensive since it does not have any cash value. The policy comes useful only if the policyholder dies within the timeframe during which the term insurance policy is in force.

Types of Term Insurance Plan

Insurance companies offer a wide range of term insurance plans with exciting features and benefits to stand out amongst competitors in the insurance space. Term insurance can be classified into the following types:

1. Regular Term Insurance Plans:

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.

2. Group Term Insurance Plans:

Group Term Insurance policies are offered to a group of individuals by an employing organization, association, or trusts and societies. It provides coverage to every member insured under the plan. It is also less expensive compared to an individual term insurance plan. Group term plans offer more or less the same benefits as individual plans, however, the only disadvantage is that the coverage expires once the employment or membership ends.

As is made obvious by the name, a group term insurance plan is meant to be an insurance instrument that can be used by a group to secure its members against untoward occurrences. These plans can be taken by any group of people or companies for their employees but can come with one essential clause or mandate set by the insurer where the policy will require a minimum number of people participating in it. For example, if a policy says that it will cover groups of at least 20 people then a small company that has less than 20 employees won’t be able to purchase the policy.

Other features of group term insurance plans include:

• Limited coverage – The benefits of group insurance schemes are similar to individual policies but the list of illnesses and other factors is not as exhaustive as individual plans. The coverage is limited based on a variety of factors i.e., time in membership, number of dependents, annual salary, etc.
• Easy to participate in – Most group term insurance plans are easy to secure. If an individual wish to participate in a group term insurance plan through employment, he/she can do so by filling up a simple form and submitting it to the employer.
• Medical underwriting not required – The members of the group policy are usually not required to undergo medical check-ups to avail coverage because the insurance provider offering the policy pools the risk of all members and adequately prices the risk.
• Policy ownership – As the owner of the policy the employer/other entity keeps the original insurance policy, also referred to as the master contract. All the individuals covered under the plan are referred to as members and will receive a certificate of insurance. This is not an actual insurance policy but proof of insurance. Group insurance plans also allow you to select a beneficiary like individual plans.
• Riders – The coverage of group term insurance plans can be amplified through the use of riders offered by the insurance company. Some of these riders are accidental death benefit rider, a partial and permanent disability rider, and critical illness rider.

3. Convertible Term Insurance Plans:

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.

The key features of convertible term insurance are described below:

• 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 can 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 timeframe 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.

4. Term Return of Premium (TROP):

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.

Key features of Term Return of Premium plans are:

• Just like a regular insurance plan, a TROP offers a refund of the premium upon the policy’s maturity, provided that the policyholder 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 offers 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 to date will be reversed. However, there will be deductions of 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 an 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.

5. Decreasing And Increasing Term Plans:

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 ensure the property is held as collateral against the loan offered. It is an additional safety component that ensures that the bank will get back the amount released as a loan, in case of the 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 level of 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 ensure 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.

6. Joint Term Insurance Plans:

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 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.

Key features of joint term insurance plans include:

• Some joint life plans payout based on the first claim. This implies that if one of the insured members dies, 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 a 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 joint life plans.

How to Choose a Term Insurance Plan:

The market is flooded with term insurance policy options, with varying policy terms, benefits and sum assured amounts. Navigating this maze of policies and making sure you choose the one that fits best and meets your requirements is a difficult task.

The following points should be kept in mind when looking for a term insurance plan:

• Reliability:

When picking an insurance policy, it is always advisable to look at the insurance company’s reputation. This is important as a term insurance policy is a long term investment and as a policyholder, you should not be left in the lurch in the event the company shuts down or meets with any difficulties. Checking the company’s FICO score would be a good way to gauge its stability and reliability.

• Claim Settlement Ratio:

The insurance company’s claim settlement ratio is an indicator of the number of claims settled out of every 100 claims received by the company. Insurance companies with a healthy claim settlement ratio are seen as more reliable and a better choice, as a higher settlement ratio is considered favorable. The IRDA publishes the claims settlement ratio for all insurance companies for a particular year.

• Riders / Add-on covers:

The riders provided by the insurance company in addition to the regular policies are also to be considered. A policy that provides the basic coverage and also offers additional benefits and riders is seen as a secure one, and insurers who provide a wide range of riders are considered a good option.

• Cost:

The amount you would be paying in terms of premium for the protection offered is a key factor in selecting a term insurance policy. Given that these policies can have a tenure of up to 20 years, the amount being paid annually as premium is a significant amount. Thus companies that offer reasonable protection for low premiums are preferred by policyholders.

• Inflation:

When selecting a term insurance policy, take into account factors like inflation. Term insurance policies are usually taken for 10-20 years, during which time inflation will erode the value of the rupee, resulting in lower returns at the time of maturity. To offset this, consider companies that offer plans where the cover increases by 5% – 10% annually to keep in line with inflation.

• Policy comparison:

It is advisable to compare insurance plans online so that you have a clear idea of the options available to you. The facility of policy comparison is offered by neutral third-party financial websites, free of cost. So, it is wise to make use of this facility as much as possible.

• Engage an insurance advisor:

In case you feel that you are unable to decide on a plan by yourself you can always seek the assistance of an insurance advisor for the same. This way you can be assured of expert insurance advice/suggestions that would enable you to pick the right policy.

• Policy terms and conditions:

You must read the terms and conditions within the policy document thoroughly before signing the dotted line. This enables you to understand the minute details of the inclusions and exclusions under the plan so that there are no confusions in the future.

1. Flexible Payment Options:

Term insurance policies offer flexible premium payment options, allowing policyholders to choose a payment plan based on their convenience. Premiums can be either limited pay, single pay, or regular payment plans. Policyholders who choose limited or regular pay plans can pay their premiums either monthly, quarterly, half-yearly, or annually.

2. High Sum Assured for Low Premiums:

Term insurance premiums are some of the lowest in the insurance sector, allowing for a prudent and relatively inexpensive way to safeguard the policyholder’s dependents in case of untimely demise. The Sum Assured associated with term insurance plans is also relatively high when compared to the premium amounts. Regular plans as well as TROP plans offer as much as 105% return on premiums paid as a benefit upon maturity.

3. Choice of Plan:

Many insurers offer policyholders a choice when it comes to the type of plan they wish to opt for. Policyholders can choose between single or joint-life plans, depending on their needs. They can thus choose to extend coverage for dependent spouses or choose a plan exclusively for the breadwinner of the family.

4. Death Benefit:

On the death of the policyholder during the policy term, his/her dependents stand to receive the amount chosen at the time of choosing the policy. The amount would depend on the term plan, with the amount increasing, decreasing, or remaining the same irrespective of at what juncture of the policy tenure the policyholder’s death occurs.

5. Tax Benefits:

Policyholders can claim tax exemptions under various sections by opting for a term insurance policy. Tax exemptions can be got under section 80C of the Income Tax Act on premium amounts.

Policyholders can also claim exemptions under Section 10 (10D) of the Income Tax Act for benefits received through insurance policies.

6. Survival Benefits:

While a regular term insurance plan does not have any survival benefits, many insurers have designed plans that also offer survival benefits in the form of premium refunds on maturity.

On maturity of the policy, surviving policyholders stand to receive benefits under a TROP policy only. In the case of a TROP policy, the policyholder will receive the premium amount paid over the policy tenure as one lump sum.

7. Add-on Benefits:

Many individuals have begun to opt for add-on features to their regular term insurance policies. These add-on plans will push up the price of the premium being paid but provide additional benefits in case of accidental death, critical illness, total and permanent disability benefit, etc.

Before anyone can take a life insurance policy, they will have to meet certain eligibility criteria which can be:

• The minimum age of the policyholder will have to be 18 years old when taking the plan.
• The maximum entry age will depend on the minimum tenure of the policy.
• The maximum age at the time of maturity for these policies can be 75 years but this could change from one insurer to the next.
• The minimum age for maturity will be determined based on the minimum age at entry and the minimum tenure offered.
• The sum assured will also be a factor in calculating the eligibility as many policies have a fixed minimum sum assured.
• This may not be mandatory but some insurers may ask you to undergo a medical check-up before taking the policy.

Documents Required for Term Insurance:

All insurance companies mandate that you submit a set of relevant documents while applying for term insurance. Following is the list of documents you will need to provide when taking a term insurance plan. Document requirements may also differ from insurer to insurer.

• PAN card
• Proof of identity using documents like passport, Voter ID card, Aadhaar card, driving license, a letter from a public servant or authority verifying identity.
• Proof of age with documents like passport, birth certificate, driving license, PAN card, etc.
• Proof of address with documents like utility bills (electricity, telephone), ration card, bank account statement, Voter ID card, or passport.
• Proof of income with documents like Income tax returns, employer’s certificate, or Income Tax assessment order.
• Some recently clicked passport-sized photos.

Covered-

• Death due to medical condition/natural death

Term insurance plan covers health related death or natural death. The death can be due to diseases or a medical condition which ultimately results in the death of the policy. Under such circumstances, the nominee of the policy holder will be paid the sum assured of the term plan.

• Accident related death

Accidental deaths are also covered in a term insurance plan. Some term insurance plans have added riders attached to it, offering an additional sum assured on death due to an accident. Accidental death is defined as a sudden, unforeseen and involuntary event caused by an external, violent and visible force. The death from this accident occurs independently of any other cause within specific number of days mostly (90 to 180 days) of such an event or trauma, will be treated as accidental death.

Not covered-

Term insurance plans cover a list of specific events and circumstances. Depending on the type of plan selected, this could be an exhaustive list. However, there are some exclusions that term insurance policies do not provide coverage for. Given below is a list of exclusions:

• Suicide:Suicide is an exclusion in all term insurance policies. Insurers will not pay dependents in the event of the policyholder committing suicide within a year of purchasing the policy. In the case of group insurance, suicide will not be liable for compensation as well.
• Death due to war, terrorism drought: Death due to natural calamities and acts of war are not covered under a term insurance plan.
• Death due to actions by the insured:Accidental death brought on by the actions of the policyholder (such as extreme sports etc.) are not covered as these are viewed as self-imposed risks by the policyholder.
• Death due to intoxication or narcotics: If the policyholder’s death was brought about by or as a result of the consumption of alcohol or narcotic substances, the insurance company is not liable to compensate dependents.

In case the life assured policyholder passes away, their dependents will be required to file a claim to receive the amount which the insurer has assured to pay on such an event. The claim process is usually quite simple and easy to follow in most cases. Given below is a step-by-step guide to filing your claim for a term insurance policy:

Step 1 – Inform the Insurer About The Claim:

The initial step to filing a claim involves intimating your insurance company regarding the claim. To do this, you must contact your insurance provider via any available channel i.e. via phone, email, or by visiting the branch. Only when you have informed the insurer about the claim will the claim settlement process be initiated.

Step 2 – Submit Required Documents:

Once you have informed the insurer about the claim, you will be required to submit the necessary documents to support your claim. Documents usually required for supporting a claim include the original insurance policy document, proof towards the claim, deceased life assured’s death certificate, and medical records, apart from some other documents. Some insurers may also ask you to submit additional documents to further verify the claim.

Step 3 – Claim Settlement and Payout:

The final step in the claim process is the decision regarding the claim and subsequent settlement. After the required documents have been provided to the insurer, the claims department will verify the documents and the claim before deciding on the settlement. The insurance company may honor the claim if everything is in order or may deny it if there is any discrepancy in the claim and proof provided for it.
Term Insurance Renewal Process

When your term insurance policy is about to expire, make sure you get it renewed on time. Term insurance policies can now be easily renewed online with just a few clicks. Here are the basic steps involved in the renewal process. This process may be different for different insurers.

• Review your policy: The first step of the renewal process to review the existing insurance policy that you have. This will give you a chance to review the cover and discounts that your policy provides and make any changes as are necessary. Since many of us may not use our insurance cover for a long time, it is wise to make changes to your cover with time as your priorities change.

• Provide policy details: User’s website and click on the policy renewal tab. Once you click on the tab, you will be asked to provide your policy details such as the policy number, date of birth, name, etc. after this step, you will be asked to confirm the details you have just provided.

• Make the payment: The last step of the renewal process is to make the payment on the policy. Nowadays, one can make the payment for policy renewal online via many channels such as by cheque, by credit card/debit card, via an ATM, via SMS, via online banking, via mobile wallets, bank auto-debit facility, bank collection centers, or at the branch office itself.

Factors Which Affect Term Insurance Premium:

When it comes to term insurance, several factors affect the premiums which the insurer quotes on your policy. These factors are:

• Age:

Your age plays a major role in the premium you pay on your policy. The younger you are, the lower your premiums are likely to be and the older you are, the higher your premiums will be. It is always advised to purchase a life insurance policy when you are young.

• Your family’s medical history:

If your family has a medical history of any critical or life-threatening illness/condition like cancer, diabetes, etc., then you will be considered a higher risk as compared to someone who does not have a family history of any major life-threatening disease/condition. A high-risk applicant will be charged higher premiums automatically.

• Your health:

Insurers will also look at the state of your health at the time you apply for the policy and also in the past. If you have been suffering from any chronic illness in the past or your current medical condition indicates any future health issues like high blood pressure, your policy premium rates might be affected. Generally, healthy applicants often have to pay lower premiums in comparison.

• Weight:

People who are obese or overweight on the weight to height ratio scale may be asked to shell out more in terms of policy premiums as they carry greater chances of medical issues in the future.

• Smokers:

It is commonly advertised by insurance providers that non-smokers are eligible for special discounted premium rates on policies as compared to smokers. This is because smokers may be at a higher risk of cancer or other smoking-related health hazards as compared to a non-smoker.

• Alcohol consumption:

Like smoking, alcohol consumption can also lead to health problems. This is why, insurers will enquire about your lifestyle habits during application as heavy alcohol consumption is linked to several health complications, increasing the applicant’s risk.

• Lifestyle habits:

Those who often indulge in high-risk activities for leisure such as skydiving, bungee jumping, paragliding, hang-gliding, or any other form of adventure sporting activity are seen as high-risk applicants and may be required to pay higher premiums. However, several insurers have designed policies especially covering these high-adrenaline activities.

• Applicant’s gender:

Insurance providers often advertise lower premium rates for women applicants as compared to men. This may be because women usually have longer lifespans as compared to men.

1. What are the services included in long-term care insurance?

2. Is long-term care insurance coverage included in a comprehensive health plan?

3. What is the tenure of a long-term care insurance policy?

4. What is the suitable age group for purchasing a long-term insurance policy?

5. How reasonable are the premiums in a long-term care insurance policy?

6. Is there a need for long-term care insurance in India?

7. What is the purpose of an emergency response system and how does it work?

8. Is long-term care important for a person who is relatively healthier than his/her peers?

9. How can I get more information about the services offered in long-term care insurance policies?

10. Is term insurance a good idea?