TERM INSURANCE PLANS

 TRADITIONAL LIFE INSURANCE PRODUCTS

Products may be tangible and intangible. Life insurance is a product that is intangible. The Insurance Agent helps the policy holder / customer understand the features of a particular Life Insurance product.

 

TERM INSURANCE PLANS

Term Insurance is valid only for a certain period that is specified in the contract. The term can range from as short as it takes to complete as airplane trip to as long as forty years. Protection may extend upto age 65 or 70 one year term policies. all premiums received under such a policy may be treated as earned towards the cost of mortality risk by the company.

Purpose

A term Life Insurance fulfils the main and basic idea behind life insurance. If the life insured dies prematurely there will be a sum of money available to take care of his / her family.

The lumpsum money represents the insured human life value for his / her loved ones.

A term insurance policy also comes handy as an income replacement plan.

In Place of Payment of a lumpsum amount to the depends in the event of an unfortunate death during the term of the policy, a services of monthly, markedly or similar periodical payout for a predefined duration may be provided to the dependent beneficiaries.

 

Disability: Usually, 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 an accident during the period of the term insurance, the insurance company will provide a payout to the beneficiaries. If the insured dies after the term ends, there are no benefits giving as the deal is over as soon as the term expires.

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. For e.g. A Pension Plan may contain Provision for death benefits to be payable in case one dies before the date when the pension is to start.

Renewability: The premium are generally charged at an annual rate for the whole duration of the 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 the stage and also the new term for which the policy is being renewed.

Convertibility: Convertible term insurance policies allow policy holders 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 temporary unable to afford its high premiums when the term policy is converted into permanent insurance the new Premium rate would be higher.

Unique Selling Proposition: The 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 hopes to protect his / her loved ones from financial insecurity in case of premature death, and who ahs a limited budget for making insurance Premium Payments.

Variants: Term assurance has a number of variants

Decreasing term assurance: Plans provide a death benefit that decreases in amount with term of coverage. A ten-year decreasing term policy may thus offer benefits of Rs.1,00,000/- for death in the fourth 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. This plan has been marketed as mortgage redemption and credit life insurance.

Mortgage redemption: It is a plan of decreasing term insurance designed to provide a death amount corresponding to the decreasing amount owned on mortgage loan. Equated Monthly Instalment (EMI) Payment leads to a reduction of the outstanding principal amount. The insurance may be arranged such that the amount of death benefits at any given time equals the balance of principal owed. The term of the policy corresponds 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 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 finding 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 leader or creditor if the insured borrower dies during the policy term. 

Insurance term assurance: As the name suggests, the Plan provides a death benefit, which increase along with the term 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 cost of living index. Premium generally increases as the amount of cover increases.

Term Insurance with return of Premium: the Plan leaves the policy holders 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 return of premium.

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

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

-      As a supplement (additional) to a savings Plan e.g. a young parent buying decreasing term assurance to provide additional protection for dependents in their growing years. Convertible term assurance may be suggested as an option where a permanent plan is non-affordable.

-      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 policy holder must bear the risks involved in such investment.

Considerations: Price is in sum the primary basis of competitive advantages in term assurance plans. This is particularly seen in case of yearly renewable term policies that are cheaper than their level premium counter parts.

Limitations of term plans: The major problem arises when the purpose of taking 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 the age of 65 or 70. Individuals would seek more permanent plans for the purpose of preserving their wealth against erosion from terminal illness, or to leave a bequest behind. Term assurance may not work in such situations.