Life insurance: how to choose the right term insurance plan

In addition to selecting the right term insurance plan and riders, carefully choose the sum insured and the duration of the plan.

By Pallavi Seth

Term insurance plans, also known as vanilla products, are the simplest life insurance plans available at an economical premium compared to other life insurance plans. These plans provide financial protection for your family members in the event of an untimely death. There are different types of term insurance plans to choose from based on need and affordability.

Types of Term Insurance Plans
Level term plans: The default life insurance cover provided by most insurers in India is a level term plan. In this type of plan, the sum insured chosen at the start of the policy remains constant for the duration of the policy. The lower your age when purchasing a level term plan, the lower your premium will be.

Increase in term insurance: This type of plan offers the possibility of increasing your sum insured at specific times during the term of the policy. The rate of this increase is predetermined. An increasing term policy is best if you expect your financial liabilities to increase significantly in the future.

Decreasing term insurance: Unlike increasing term insurance, in this case, the sum insured decreases at a predetermined rate as your age increases. It works on the idea that as your age increases, your debts might decrease and the need for a higher sum assured might also decrease. It is perfect for you if you have taken out a loan or mortgage and plan to pay it back in the near future.

Term insurance with return of premium: A return of premium plan gives you a savings component that is not usually offered by term plans. If you survive the term of your contract, all premiums paid up to the due date are refunded to you.

Convertible term insurance plans: A convertible term insurance plan is a policy that can later be converted into another type of insurance plan; for example, a whole life plan or an endowment plan. If you expect your financial priorities to change in the coming years, you can opt for this.

Types of runners
Term insurance plans come with different types of additional benefits called riders. Riders provide additional benefits by paying additional premiums.
Waiver of premium rider: If you choose the waiver of premium rider, the insurance policy remains in force even if you are unable to pay the premium. If you have paid term insurance premiums, but due to a disability you stop earning money and are unable to pay the premiums for the full term. Fortunately, if you have this rider, your premiums are waived in the event of disability during the term of your policy.

Accidental death endorsement: If the insured dies following an accident, the endorsement pays the additional insured capital to the family members.

Accelerated Death Benefit Rider: If you are terminally ill, your family will incur huge medical costs for your treatment. With this endorsement, you benefit from a partial advance on your insured capital when you are seriously ill. If you have less than 12 months left to survive, the advance payment can be used for treatment and expenses necessary to stay alive. The remaining amount is paid to the family/applicant once you are no longer alive to support your family emotionally and financially.

Permanent and partial accidental disability endorsement: It comes into force only if the disability occurs following an accident. Total disability gives you a full sum insured. Partial disability gives partial sum insured. The amount can also be compensated in several installments. Most insurers pay regularly for 5 to 10 years at a certain sum assured rate. The terms and conditions of this endorsement differ from insurer to insurer.

Critical Illness Rider: Insurance companies pay a lump sum if the insured is diagnosed with a critical illness specified in the policy. When selecting this rider, read the policy document carefully to find out which illnesses are covered and which are part of the exclusions.

In addition to choosing the right term insurance plan and riders, it is equally important to choose the sum insured and the duration of the term insurance plan carefully. Although the rule of thumb states that your sum insured should be 10 to 15 times your annual salary, other factors should be considered. Certain phases of life such as marriage, higher education abroad and retirement require additional financial assistance. The choice of sum insured under a term plan should be made accordingly. Calculate your liabilities, savings and investments. For this, you can also use human life value calculators available online on most insurer websites.

The author is Assistant Professor, Amity School of Insurance, Banking and Actuarial Science

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