Before you sign the proposal form and write a cheque, it would be worth understanding the various types of term insurance policy and short listing the product that suits your needs, here is you guide to understanding the various types of term plans.

Various types of Term Insurance policies

Term plans are normally insurance plans that do not have cash values, i.e. you pay premiums and in return, the insurance company would cover the economic value of your life. This cover is maintained as long as you pay the premiums. The cover would cease at the end of the term.

Level Term Insurance

As the name suggests the cover that you choose based on your income, net assets and liabilities would remain constant. For e.g. If you choose insurance cover of Rs. 50 lacs for 20 years then cover would remain Rs. 50 lacs during this entire tenure. This type of cover is easy to understand and provided invariably by all the life insurance companies. The tenure for level term insurance can be as high as 35 years or till age of 70-75 depending on criteria’s established by the insurer.

Decreasing Term Insurance

Most advisors advocate that as the age of the person increases the economic value of the individual keeps on decreasing, thus ideally a person should buy insurance where the cover decreases with progressing age. In such kind of plans the sum insured would be decrease by a certain defined % age for e.g. if you buy insurance cover for Rs. 50 lacs for 20 years the cover would decrease by 5% each years. i.e. after 10 years you would be left with cover of Rs. 25 lacs instead of Rs. 50 lacs. Normally, such plans are used for mortgage or loan protection.

The advantage of this type of cover is that the premium is cheaper when compared to level term insurance. The premium though would be level. Normally the term would be restricted to 20 years.

Increasing Term Insurance

In a country like India which has high inflation rate and high annual salary rises, , there is a danger that the insurance cover that we may have might not be sufficient in other words we may be underinsured. To take care of this concern insurance companies offer a term plan where the insurance cover raises at predetermined rate. Let us understand this by expanding the above example. At inception the cover would be Rs. 50 lacs and the sum insured increases by 5% for each year till it is equal to base cover. So, after 10 years the cover would be Rs. 75 lacs.

Tenure of this type of insurance is also not as liberal as the level term insurance and normally is 20 years .Further; there would be restricted riders that would be available. The premium would normally be higher than other two types of insurance discussed above.

Level Term Insurance with return of premium

Many analyst and advisors would rubbish this sort of term of insurance, but still there are takers of this type of term insurance. In this type of term plan the premiums paid would be returned at the end of the tenure. For e.g. if you pay Rs. 10,000 annually for 20 years for a cover of Rs. 50 lacs at the end of the tenure the insurance company would hand over a cheque of Rs. 2 lacs (10,000X20). Some companies may be more innovative and agree to pay 125% of total premiums on maturity .In such instance Rs. 2.50 lacs would be payable at the end of the term.

It would be worth noting that premiums are higher than Level term insurance and you have to bear in mind that service tax paid is never refunded.

Now, that you understand the various types of term insurance cover, you can discuss with your advisor and proceed to buy the type of insurance that is suitable to your needs. You would not be fooled into buying a cover that is not required by you.