TERM INSURANCE

Term insurance is an insurance plan for a specified term or period. It is valid only during a certain time period that has been specified in the contract. The term can range from as short as it takes to complete an airplane trip to as long as forty years or more.

Protection may extend up to age 65 or 70. One-year term policies are quite similar to property and casualty insurance contracts.

A term insurance policy also comes in handy as an income replacement plan and the features of insurance are as under:-

a) Disability

Normally a term insurance policy covers only death. However, when it is purchased with a disability protection rider on the main policy, and if someone were to suffer such a catastrophe during the period of term insurance, the insurance company will provide a payout to the beneficiaries/insured person.

b) Term insurance as a rider

Protection under term life is usually provided as a stand-alone policy but it could also be provided through a rider in a policy.

Example:-

A pension plan may contain a provision for a death benefit to be payable in case one dies before the date when a pension is to start.

c) Renewability

The premiums are generally charged at a fixed annual rate for the whole duration of term insurance. Some plans have an option to renew at the end of the term duration; however, in these products the premium will be recalculated based on one‟s age and health at that stage and also the new term for which the policy is being renewed, therefore this advisable to buy the term insurance policy in the early age.

d) Convertibility

Convertible term insurance policies allow a policyholder to change or convert a term insurance policy into a permanent plan like “Whole Life” without providing fresh evidence of insurability. This privilege helps those who wish to have permanent cash value insurance but are temporarily unable to afford its high premiums. When the term policy is converted into permanent insurance the new premium rate would be higher.

e) USP

The unique selling proposition (USP) of term assurance is its low price, enabling one to buy relatively large amounts of life insurance on a limited budget. It thus makes a good plan for the main income earner, who wishes to protect his/her loved ones from financial insecurity in case of premature death, and who has a limited budget for making insurance premium payments.

f) Variants

A number of variants of term assurance are possible.

i. Decreasing term assurance

These plans provide a death benefit that decreases in an amount in terms of coverage. A ten-year decreasing term policy may thus offer a benefit of Rs. 1,00,000 for death in the first year, with the amount decreasing by Rs. 10,000 on each policy anniversary, to finally come to zero at the end of the tenth year. The premium payable each year however remains level.
Decreasing Term Assurance plans have been marketed as mortgage redemption and credit life insurance.

Mortgage redemption is a plan of decreasing term insurance designed to provide a death amount that corresponds to the decreasing amount owed on a mortgage loan. Typically in such loans, each equated monthly installment (EMI) payment leads to a reduction of the outstanding principal amount. The insurance may be arranged such that the amount of death benefit at any given time equals the balance of principal owed. The term of the policy would correspond to the length of the mortgage. The renewal premiums are generally level throughout the term. Purchase of mortgage redemption is often a condition of the mortgage loan.

Credit life insurance is a type of term insurance plan designed to pay the balance due on a loan if the borrower dies before the loan is repaid. Like mortgage redemption, it is usually decreasing term assurance. It is more popularly sold to lending institutions as group insurance to cover the lives of the borrowers of these institutions. It may be also available for automobile and other personal loans. The benefit under these policies is often paid directly to the lender or creditor if the insured borrower dies during the policy term.

ii. Increasing term assurance

As the name suggests, the plan provides a death benefit, which increases along with the term of the policy. The sum may increase by a specified amount or by a percentage at stated intervals over the policy term. Alternatively, the face amount may increase according to a rise in the cost of living index. Premium generally increases as the number of coverage increases.

iii. Term insurance with return of premiums

Yet another type of policy (quite popular in India) has been that of term assurance with the return of premiums. The plan leaves the policyholder with the satisfaction that he/she has not lost anything in case he/she survives the term. Obviously, the premium paid would be much higher than that applicable for an equivalent term assurance without the return of premiums.

g) Relevant scenarios

Term insurance has been perceived to hold much relevance in the following situations:

i. Where the need for insurance protection is purely temporary, as in the case of mortgage redemption or for protection of a speculative investment

ii. As an additional supplement to a savings plan, for instance, a young parent buys decreasing term assurance to provide additional protection for dependents in the growing years. Convertible term assurance may be suggested as an option where a permanent plan is non-affordable.

iii. As part of a “buy term and invest the rest” philosophy, where the buyer seeks to buy only cheap term insurance protection from the insurance company and to invest the resultant difference of premiums in a more attractive investment option elsewhere. The policyholder must of course bear the risks involved in such investment.

i) Considerations

Price is in sum the primary basis of competitive advantage in term assurance plans. This is particularly seen in the case of yearly renewable term policies that are cheaper than their level premium counterparts.

The problem with such one-year term plans is that mortality costs rise with age. They are thus attractive only for those with a short period of the insurance planning horizon.

Important

Limitations of term plans

At the same time, one must be aware of the limitations of term assurance plans. The major problem arises when the purpose of taking an insurance cover is more permanent and the need for life insurance protection extends beyond the policy period. The policy owner may be uninsurable after the term expires and hence unable to obtain a new policy at say age 65 or 70. Individuals would seek more permanent plans for the purpose of preserving their wealth against erosion from a terminal illness or leaving a bequest behind. Term assurance may not work in such situations.

Documents required for obtaining term insurance

Last 3 Years Income Tax Returns or last 6 months Bank Statement in case of Salary Income.

Copy of PAN Card

Copy of Adhaar Card

The term insurance can only be granted to the earning member of the family and the income should be self-earned, the interest income, income from other sources, and capital gain cannot be considered as income for getting term insurance. The Income should be salaried income or income from business or profession.