A term insurance policy, that only charges you for the cost of insurance, is what you should buy if you need a cover to protect your family. However, there are various types of term insurance covers that you should understand so that you can choose according to your needs.
Pure term plan
The simplest and cheapest of all, this one pays a fixed sum assured on the death of the policyholder. However, if the policyholder survives the term, he gets back nothing. The premium on term plans depends on three factors: age, term of the policy and the sum assured you choose. Even as term plans are the cheapest insurance product you get a further discount by buying them online.
Return of premium plan
Not everybody likes the thought of paying for years and not getting anything back at the end. Return of premium plans are meant for such people. These are slightly more expensive policies since they promise a return of premium. The policyholder gets the return of premium at the end of the term, but if he dies mid way, the nominee gets the sum assured.
A popular with mortgage products, the sum assured in this plan decreases every year, as does your outstanding loan amount. The premiums on these plans are lower than that of a level term plan since every year the sum assured decreases. Banks may bundle the single premium version of this policy and pay the premium on your behalf. The amount of premium gets added to your total debt liability, which you pay through an increased EMI. While it may seem easier to pay a single premium and get that added to your debt, a more cost effective technique is to pay regular premiums and that too on your own.
This is the opposite of a decreasing plan. Here the amount of cover increases by about 5% every year until your sum assured increase by 50% or doubles up in value. The premiums are on the higher side as the insurer puts more money at risk every year. Unless you are sure that your assets won’t suffice for your family, avoid this one.
This combines the benefits of a term plan with a savings plan. Here, initially you buy a term plan, which you can convert into an investment-cum-insurance plan later. So, you cover your insurance needs during, say, your initial years of work and if you think you have saved enough over the years, you switch to a different plan where a part of your money is invested. However, your premium may change at the time of conversion.