Term Plan with benefits- should one consider it?
What is a term insurance plan?
Term insurance plan is a type of life cover
• It provides coverage for a defined period of time, and if the insured expires during the term of the policy then death benefit is payable to nominee.
• Term plans are specifically designed to secure the family needs of a person in case of death or uncertainty.
• It provides specific amount of coverage for specific period of time
Why should a person buy a term plan when it gives nothing in return when he/she is alive?
• Term plans usually give maximum coverage for the lowest premium amount. Term plans can be used effectively if their benefits are understood well and they are used based on the requirement and circumstances.
• Term plan is suitable for those who do not want to merge their investment objectives with risk objectives. If the policyholder is fine during the tenure of the policy, no money is given to him or his family members. However, in case of death of the policyholder, the family members gets the sum assured. Though the premium is quite low for high coverage, it can be increased or decreased at the end of each term. It covers not only the policy holder but his family members as well in case of any unforeseen tragedy.
Simple Term policy
- A simple term policy is one in which the policy holder does not get any of his premium back if he/she outlives the term.
- Unlike some insurance policies that are valid until the time of one’s death, a term plan policy is taken for a specific period, usually for 10, 15, 20, 25 or 30 years.
- Some new age term plans today offer cover up to 75 years of age.
- While term plans may not provide the lifetime security that universal plans provide, they are quite lucrative because of their incredibly low premiums.
- This makes term plans very affordable for people who are unable to pay high premiums (usually required for life insurance products with savings and investment option) but still want the safety and security of an insurance policy.
Term plans with return of premiums
- It is a variation of the traditional term planin which the policy holder is returned the entire premium amount that he/she has paid over the tenure of the policy, excluding taxes.
- This essentially means insuring oneself so all the money one puts into the policy throughout the term is being returned back, should the person survives the term of the policy.
Is it better to opt for a Pure Term Plan or should One buy a Term plan with benefits?
Let us discuss the advantages and disadvantages with regard to both the types of plans and then we can come at a decision as to which one is the most appropriate to buy.
PURE TERM PLAN
- In regular term insurance, insurers pay only when the insured person dies.
Consider a policy with Rs 50 lakh cover for 20 years for which the yearly premium is Rs 5,000. If the insured dies, the family will be paid the sum assured, that is, Rs 50 lakh. However, if the insured survives the term, the insurer will return the premium or Rs 1 lakh (Rs 5,000 x 20).
- In term plans, the premium depends upon the claim ratio experienced by the company.
RETURN OF PREMIUM TERM PLAN
- ROP plan, comes with death benefits, that returns the premium paid if the policyholder survives the policy term.
- ROP plans also have a ‘paid-up’ option if the person defaults on premium payments. This means that if one stops paying the premium after at least three years, the policy continues, but with reduced benefits. While the premium paid will be returned at maturity, the nominee will get a reduced sum assured if the insured dies. This reduced sum assured is a percentage of the original cover with respect to the number of premiums paid against the original term.It is important to know that the exact sum will differ for each policy. The caluclation is based on the paid up value of the policy.Further, surrender benefits also differ from plan to plan.
- ROP plans also provide benefits such as accident and disability covers. But all additional benefits come at a cost.
- The underwriting is similar to term plans.
- However, ROP term plans are much more expensive than regular term plans. The premium rises further with any additional feature that one might add
- However, unlike term plans, where the benefit is uncertain, in return of premium plans, the benefits payable at death (sum assured) and maturity (return of premium) are fixed.
TERM PLAN IS BETTER
ROP plans are marketed in such a way that they look like ‘free insurance’. However, they are not the best option.
For example, an ICICI Pru iCare term policy with a cover of Rs 20 lakh for 15 years will cost a 30-year-old male Rs 3,708 a year. However, a ROP plan offered by the same insurer will cost Rs 31,768 for the same sum insured and term. This means a difference of Rs 28,060 every year for 15 years is what you pay extra just to get your premium returned back, without interest.
Now, if this difference, of Rs 28,060, is invested for 15 years at an interest rate of 10% a year, it will return Rs 9,80,689. By choosing a return of premium plan one will get only the premium or Rs 4,76,520. The difference, or rather the loss, is an amount of about Rs 5,04,169.
A return of premium plan charges twice or thrice a normal term plan and still cannot provide the same level of life cover. If an investor is looking for returns, it is better to invest in a unit-linked plan or in mutual funds.
A pure term plan is thus better in the sense that it will give maximum coverage for the lowest premium amount
Debalina Roy Chowdhury
Dilzer Consultants Pvt Ltd.
3 June 2016