DYK: There are various types of term plans2 min read . Updated: 18 Jul 2016, 07:51 PM IST
A term plan promises to pay an assured sum to the beneficiary if policyholder dies during the policy term. Income-benefit plans break up this assured sum
Mint has always advised you to keep your insurance and investment needs separate. For life insurance needs, a term plan is better as it only charges you for the cost of insurance. If a policyholder dies during the policy term, the nominee gets the sum assured, or the insurance money. If the policyholder survives the policy term, she does not get anything. Term plan is the simplest and the cheapest way to insure your life. But there are many types of this policy. Here, we tell you about three.
INCOME-BENEFIT TERM PLAN
A term plan promises to pay an assured sum to the beneficiary if policyholder dies during the policy term. Income-benefit plans break up this assured sum. In insurance parlance, it is called sum assured, which is divided into monthly or annual payments for a fixed number of years, in order to provide regular cash flows to the nominee. A periodic income is easier to handle, especially if the nominee is not able to optimally utilise the lump sum. Most plans will break the sum assured into a lump sum, to cater to the immediate financial crunch, and subsequently into periodic income for a fixed number of years. There are also plans that increase the cash flow every year, to account for inflation.
The other type in the income-benefit category is the income-replacement plan. Instead of paying a fixed sum for a fixed number of years, it offers a steady stream of income until a goal is reached. Read the terms of such plans carefully. Being goal specific, the total benefit payable to the beneficiary may reduce if death occurs closer to the goal. An income-replacement plan works best as a second insurance policy, which you buy to compliment your insurance needs.
DECREASING TERM PLAN
This type of term plan is sold with mortgage products. The sum assured in this plan decreases every year, as does your outstanding loan amount. Typically, you get a decreasing term plan under the group insurance platform, where the bank is the master policyholder. Remember, most of these policies are sold as single premium plans. The premium that you need to pay is often bundled in the loan amount, so you end up paying an equated monthly instalment (EMI) to repay the premium too.
Buying such a term plan is not mandatory but it is advisable, to cover big-ticket mortgages like home loans. You can also buy an online regular premium term plan to cover a mortgage.
RETURN OF PREMIUM PLAN
Not everybody likes the thought of paying for years and not getting anything back in the end. Return of premium plans are meant for such people. However, they come at a cost. The premiums that you pay under this policy are much higher than those paid for pure term plans, because while a basic term insurance policy only charges you for insurance, this policy will also charge you for returning your premiums at the end of the term. So, if the policyholder dies during the policy term, the nominee gets the sum assured. If she survives, the premiums are returned. Mint Money recommends pure term plans.