What are the different Types of Term Plans?

Term plans provide pure cover at a lower price. It is a wonderful life insurance tool that everyone must have. There are however different types of term plans that cater to different needs. The types of term plans include pure term plans, return of premiums term plans, decreasing term plans, increasing term plans and convertible term plans.

What is a pure term plan?

A pure term plan is nothing but an insurance policy that covers your life for a fixed period of time and promises to pay a fixed sum assured to your family in the case of your death. A pure term plan is the easiest and least expensive type of term plans. The premium you pay for a pure term plan depends on your age, the term for which you buy the plan and the sum assured you opt for. The premium remains intact throughout the policy and you also get a discount if you purchase the plan online. If you outlive the policy, you don’t get anything in return.

What is a return of premium term plan?

A term plan usually doesn’t have a return component. This means that the policyholder pays the premium only for life cover and if he lives, he doesn’t receive any benefit at the end of the term. However, if you opt for a return of premium term plan, the premium will be returned if you outlive the policy period. This type of a term plan is, however, more expensive that a pure term plan.

What is a decreasing term plan?

This is a kind of term plan where the sum assured keeps decreasing throughout the policy period. The premium usually remains constant but the sum assured is lowered either annually or semi-annually. This kind of term plan is popular with mortgage holders who buy the plan for the period over which they repay the loan. As the loan amount decreases, the sum assured of the term plan decreases as well and the plan usually terminates when the loan is repaid.

What is an increasing term plan?

An increasing term plan is the opposite of a decreasing term plan and here the sum assured increases each year. This is a pretty costly type of term insurance as the sum assured rises every year. This is a type of term plan that is bought to secure the policyholder against inflation. If the policyholder feels that the sum assured would not be sufficient in the years to come with rising costs, he can opt for this type of term insurance. The sum assured goes up by 5% every year up to a maximum of 50%, i.e. till the time the original sum assured is doubled.

What is a convertible term plan?

A convertible term plan is a type of term insurance policy which can be converted or changed into an endowment plan later in the duration of the policy. The premium rate will change at the time of conversion and become higher. A convertible term plan is ideal for a person who wants to have his life insured at a lower cost early on in life but wants to invest in the insurance plan to address additional financial responsibilities at a later stage in life.