By India CSR Research Team
Ever wondered, why there is so much fuss about term plans? After all, isn’t term plan just another life insurance? Is there any difference between a life insurance and term insurance? For many of us, the relation might sound so obvious that we may never have bothered with the difference.
So, what is term insurance? How is it different from life insurance plans? Let’s try to understand the term and life insurance with the following examples and explanations.
What is Term Insurance?
Term plan can be defined as a pure life insurance plan which provides coverage for a fixed period, that is ‘term’, giving it the name, ‘term insurance plan’. Once this term expires, the life cover ends. Term insurance critics often point to the fact that the insured does not receive any benefit in the end if he/she survives the term of cover. Making the premium paid to be lost to the insurer.
But this is also a unique feature of a term plan is that the insured doesn’t get anything by paying the premiums but in case of death within the valid term, the beneficiary or the nominee gets the death benefit. Another unique feature of the term plan is that this plan costs the least among every type of plans, mostly because this plan doesn’t mature nor creates a liability on the insurer.
There has always been a debate about the term plans offering zero benefits to the insured upon surviving the term. From and investor point of view, a pure life insurance plan without any maturity benefit will make less sense.
Consider This Example
Rajat is 30 years of age and has a family of four including his spouse and two kids. He buys a term life insurance of Rs. 1 cr. sum assured at a premium cost of Rs. 10,000 per year. The cover will continue till he reaches retirement, that is at the age of 60.
Rajat’s term cover will terminate in any of the following conditions whichever happens first:
- Rajat does not pay the annual premiums for two consecutive years
- Rajat reaches the retirement age of 60
- In the event of unfortunate demise
In the first two cases, Rajat or his family members will not receive any benefit from the insurer. However, in the last scenario, the policy will pay the sum assured of Rs. 1 cr. to Rajat’s family.
Types of Term Plans
In India term, insurance plans are only classified based on premium payment modes. That is term plans will have three different premium modes:
- Regular Premium Payment Mode
- Partial Premium Payment Term
- One-time Premium Payment
However, nowadays you can also opt for ‘return of premium’ option with your term insurance. This enables the insured to receive all the paid premiums back from the insurer at the end of the policy term.
For Example
Assume Rajat adopted for the return of premium option in his term insurance plan, and reaches the retirement age. Following two changes will occur:
- Rajat will pay a slightly higher premium; assume Rs. 12,000 p.a.
- At the end of the 30-year tenure of the policy, he’ll receive Rs. 360,000 (12,000 x 30) as sum of all premiums paid
What is Life Insurance?
Life insurance plans, however, try to cover for the shortcoming in the term plan, by offering a maturity benefit. Thus, if the insured survives the policy term, he/she will be paid a pre-decided sum as maturity benefit by the insurer. If the insured does not survive, life insurance works as a simple term insurance by providing the family with the sum assured.
Consider This Example:
Instead of a term insurance, Rajat buys a life insurance policy with maturity benefit. Following things will take place:
- The premium will be significantly higher. Can be up to Rs. 500,000 for a Rs. 1 crore traditional life insurance
- Rajat will possibly choose a more affordable sum assured; say Rs. 20,00,000 at an annual premium of Rs. 60,000
- At maturity, he will receive Rs. 20,00,000
- In the event of his unfortunate demise, his family will receive Rs. 20,00,000 from the policy
Types of Life Insurance Policies
There are several types of life insurance plans depending on how the maturity benefit is paid or accumulated:
- Endowment Plans
- Money Back plans
- Unit Linked Plans (ULIPs)
- Whole Life Plans
Endowment and money back life insurance policies are the two oldest and most popular form of life insurance plans. While both plans offer safe returns, the maturity benefit is paid out differently.
ULIPs offer different investment choices for investors looking for higher, or market linked returned.
Whole life plans are a type of endowment plans where natural maturity term is about 100 years. Thus, the maturity benefit is only paid on the death of insured to the next generation or nominees. This life insurance is a good tool for estate planning.
