When it comes to buying life insurance for yourself, the best option is to go for a simple term insurance policy. Period.
With that aside, your next question would be – which is the best term insurance plan to buy?
The answer isn’t simple anymore.
Earlier, term plans came in just one version, i.e. they paid lumpsum (sum assured) at the death of the insured person.
But now, the insurance companies have introduced many variations of these term life insurance plans.
Majorly, these variations give the policyholder different options to decide how the total sum assured is paid out to the nominee in case of policyholder’s death.
But think about it…
Why would you anyone even think about the other versions of the simple term plan?
It will become clear as I explain it in the next sections.
You will realize that just buying a Rs 1 crore term plan or some other plan is not enough. You really need to think hard about how the money will be handled after you and accordingly, choose the right version of the term plan.
So let’s move on…
Types of Term Insurance Policies in India
Let’s see how these term plan varieties differ from each other.
1 – Term Plan with Lumpsum Payout
This is the most basic version.
Let’s say you buy a term plan of Rs 1 crore. In case you die during the policy tenure, your nominee will be paid the full amount of Rs 1 crore in one go. Nothing more, nothing less.
There is nothing much to explain about this option.
The other remaining options of the term insurance plans in India take the staggered route to money payout.
2 – Term Plan with Fixed Monthly Payout
In this plan, there is no lumpsum payout. Instead, the sum assured is utilized to provide a regular monthly income to the nominee for a fixed number of years.
For example – You take Rs 1 Crore term plan. Now if you die within the policy tenure, then the sum assured is paid out as a monthly income of Rs 83,333 for next 10 years (i.e. Rs 83,333 x 12 x 10 = Rs 1 Cr).
This monthly income can either be fixed (as above) or can also be increasing one.
3 – Term Plan with Lumpsum + Fixed Monthly Payout
In this plan, a percentage of the sum assured is paid out at the time of death. The remaining amount is paid as a monthly income, which is a fixed percentage of the remaining sum assured for a fixed number of years.
For example – You take Rs 1 Crore term plan. Now if you die within the policy tenure, a percentage of the sum assured let’s say 40% (i.e. Rs 40 lac) is paid out immediately. The remaining 60% (or Rs 60 lac) is paid out as monthly income of Rs 50,000 for next 10 years (i.e. Rs 50,000 x 12 x 10).
4 – Term Plan with Lumpsum + Increasing Monthly Payout
In this plan, a percentage of the sum assured is paid out at the time of death. The remaining amount is paid as a monthly income, which increases at a pre-determined percentage on a simple interest basis on every policy/death anniversary for a fixed number of years.
For example – You take Rs 1 crore term plan. Now if you die within the policy tenure, a percentage of the sum assured let’s say 40% (i.e. Rs 40 lac) is paid out immediately. The remaining is paid out as a starting monthly income of Rs 50,000 which increases by let’s say 10% every year. So next year, the monthly payout will be Rs 55,000 and so on. Generally, the total payout in this version is more than the original sum assured.
In both the above options (lumpsum + fixed monthly payout and lumpsum + increasing monthly payout), the lumpsum % can be different as per insurer’s or policyholder’s choice. There are many plans that even pay 100% of the sum assured upfront and additionally pay a monthly income (fixed or increasing) to the nominee.
For example – You take Rs 1 crore term plan. Now if you die within the policy tenure, full Rs 1 crore is paid out to the nominee immediately. In addition, a monthly payout of Rs 50,000 is made for the next 10 years. The total payout in this version is more than the original sum assured. To be exact, it is Rs 1 crore + Rs 60 lac (Rs 50,000 x 12 x 10).
These are the major versions of the term plans that are available these days.
Now let me address the point that I raised earlier – Why would anyone even think about the other versions of the simple term plan where the payout is staggered?
Quite often, the nominees lack proper personal financial knowledge when it comes to handling large sums of money. So once they receive a large amount, they may be unable to properly manage the sudden increase in wealth and end up losing it by listening to the wrong people.
So in order to overcome this concern, many insurance companies came up with various other payout options.
This way, the nominees receive a part of the amount as lumpsum to take care of immediate concerns (like closing all loans, other big expenses in the near term). The remaining amount is paid as monthly payments over a pre-decided number of years, to replicate the regular income pattern and help smoothen the life of the nominees.
That is the major reason for the launch of these different versions.
So depending on the ability of your nominees to handle money, you should pick the adequate option:
- If you are sure your nominee is well-versed in personal finance, then you can go for the full lumpsum payout term plan.
- If you feel the nominee is better off not having a large amount suddenly (due to any reason you think), then you can go for the staggered-payout term plans.
- If you feel that if your sudden death will result in financial chaos (due to outstanding loan or planned big expenses in the near term), then you can take the term plan that pays a % as lumpsum and remaining as monthly income (if you feel the nominee will be unable to handle money properly).
As you might be feeling right now, there are cases where opting for the staggered payout option actually makes sense.
Ofcourse from a purely financial perspective, it’s best to take the lumpsum and invest it efficiently and try to generate income from it for the nominees. But all decisions cannot be taken just from mathematical perspectives.
Do premiums vary for different Term Plans?
Yes of course.
Different versions of the term plan have different premiums.
To give you an idea, here is a snapshot of the various versions, with their benefits and approximate annual premiums for a 30-year old, non-smoking male living in a metro city and buying a 30-year term plan:
The first one is the normal term plan that you know of – pays lumpsum amount (equal to the sum assured at the death of policyholder). Others are different plans paying different monthly incomes which is either fixed or increasing each year.
There are several term insurance premium calculator available online. It’s best to check out the premiums for different types of policies for yourself.
The actual premium that you will have to pay will depend on a variety of factors. If you take a policy for a longer tenure, then it will cost more. In general, shorter the policy term, lower will be the premiums. To choose the right policy term, do read what should be the ideal term insurance policy term?
And I almost forgot telling you about another variety of Term Plans that has been pitched by a lot of agents in recent times – Return of Premium Term Plan.
Is Return of Premium Term Plan Good?
A lot of people who wish to buy term plans have this feeling that since they will survive the policy period, the premium which they are paying will be wasted.
For these people, insurance companies have come up with a term plan where the premium paid over the course of policy tenure is returned back if the person survives.
At the face of it, this seems like a good idea. And this policy did address the concerns of people who thought that the term plans are a waste of money.
But if you deep dive a bit, things aren’t that great. Such policies have premiums much higher than the normal term plans.
If we were to compare a plain term plan (that only pays lumpsum amount) with a term plan (that also only pays lumpsum) with the return of premium option, then the premiums are Rs 9717 for a plain term plan and Rs 24,968 for return-of-premium term plan.
These premiums are for a 30-year old, non-smoking male buying a 30-year term plan living in a metro city.
Let’s compare these two plans a bit more.
The total premium paid is Rs 2.91 lac for plain term plan (Rs 9717 annually x 30 years) and Rs 7.49 lac for return-of-premium term plan (Rs 24,968 annually x 30 years).
In case of death during policy tenure, the nominee gets Rs 1 crore in both cases (as the sum assured is same).
But in case of survival, things change.
In case of plain term plan, you get back nothing – that is, you don’t get back Rs 2.91 lac. On the other hand in case of Return-of-Premium Term Plan, you get back your Rs 7.49 lac.
You may again feel that the return of premium plan is better. But remember that you are paying a high premium for that.
The difference between the annual premium of the two plans is a little more than Rs 15,000 (= Rs 24,968 – Rs 9717).
If you invest this difference amount of Rs 15,000 every year at just 8%, then at the end of 30 years you will have about Rs 18-19 lac. Compare this with the amount the return-of-premium offers you at the end, i.e. Rs 7.49 lac.
So the obvious conclusion is that it’s better to not purchase a return of premium term plan. You are better off with either a simple term plan (or some of its variants that offer monthly income).
Term insurance is still the best insurance that you should be buying for covering your life. The traditional ones like endowment, moneyback insurance plans are best avoided.
But since term plans also come in various shapes in sizes, its natural to ask which is the best term insurance plan for you?
As mentioned earlier, the choice of the term plan variety is dependent a lot on how capable do you feel your nominees are in managing money. If they are financially aware, going for a lumpsum payout is best. If they aren’t and you want to provide them with a regular income for a few years after you die, then take the lumpsum + monthly income payout option. Or you can have the best of both worlds by taking two policies combining the two approaches.