Term Insurance Plans: FAQs

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The earlier post: Lesser known details about term plans, examined why term plans are considered as the best way to insure life and why insurers and agents are reluctant to sell them.

This post will answer some of the questions frequently asked about term plans such as basic features, types of term plans, maximum tenure of a term plan and best term policies available in India.

Term Insurance Policies: FAQs

1. What are term Plans?
Term plan is a pure risk coverage life insurance plan with no maturity benefit that takes care of your family or dependents in case of any unforeseen eventuality. It provides a lump sum to the family in case of death of the life assured during the policy tenure.

Other Unique features of Term Plans:
1. No surrender benefits
2. No Paid up value
3. No benefits are payable on maturity / survival
4. Most of the policies also offer riders such as Accidental Death Benefit (ADB), Permanent Disability Benefit (PDB) and Critical Illness Benefit (CIB) on payment of additional premium.


2. Are term insurance plans eligible for tax benefits?
Premium paid on term insurance policies is eligible for tax deduction under section 80C and death benefits are exempt u/s 10(10d) of IT Act, 1961.

Furthermore, premium paid on critical illness rider is eligible for tax benefit u/s 80D of IT Act, 1961.


3. Are the term plans available in the market similar in all respects?
Broadly speaking, yes they are similar with minor differences in terms of duration, maximum entry age, minimum and maximum sum assured, cost etc. I’ll be reviewing few of the term insurance plans in subsequent posts.


4. How many types of Term Plans are there?
There are broadly two kinds of term insurance policies – Pure Term Plans without return of premium (WROP) and Term Plans with return of premium (ROP).

Second classification is based on conversion option. There are simple term plans without conversion option and convertible term plans.

Convertible term plans provides you an option to convert your term plan into another insurance policy at a future date. For example, Kotak Term Plan offers you conversion option to convert it to any other plan offered by Kotak Life Insurance (except for another term plan) provided there are at least 5 years before cover ceases.

Majority of the term insurance plans available in the market are non-convertible type.

There is yet another factor (sum assured) based on which we can group them. First is a level term insurance plan and second is increasing sum assured term plans. As opposed to level term insurance plans, where sum insured remains constant throughout the term of the policy, in case of latter the cover keeps on increasing as you grow older. For example, in addition to level term cover, SBI Life Shield also offers you 2 other options of increasing sum assured. Under the first option, the basic sum assured increases by 5% for each policy year and in the second option there is a 50% increase in the cover after every 5 years.

Finally, like traditional insurance plans and Ulips, we can also distinguish term policies based on premium payments. First kind is single premium plan (paid in lump sum at the time of purchase of policy) and the other one is regular premium plan (paid at regular intervals).


5. What’s the difference between term plans and home loan term plans?
While term insurance plans provide same coverage (i.e., level term cover) throughout the policy term, home loan covers come with declining coverage i.e., which reduces in line with the loan amount and expires when the loan is fully repaid. In other words, the coverage provided under declining liability home loan term plans (such as ‘ICICI Home Assure’ and ‘HDFC Home Loan Protection Plan’) decreases as the outstanding loan amount decreases.


6. What’s the maximum tenure of a term plan?
The maximum duration of term insurance policies is generally 25 years with a few companies even offering term plans for a term up to 30 or even 35 years.

There is yet another condition that maximum age can’t go beyond 60 or 65 years (some plans extend even up to 70 or 75 years).

For example, while HDFC Term Assurance Plan is available for maximum tenure of 30 years with the second condition that maximum age at expiry not to exceed 65 years, ICICI Pru Pure Protect Classic is also available for a maximum duration of 30 years but maximum age at expiry is increased to 75 years. Therefore, an individual aged 45 years looking for a term plan for 30 years can choose the term plan of ICICI in comparison to HDFC.


7. How to Compare various term plans? Is the premium quoted by the insurance companies on their brochures final? Or, are there any other charges involved?
Yes, the premium charges mentioned by life insurance companies on their brochures are final. But understand the following:

a. While some life insurance companies quote the premium rates inclusive of service tax (& Cess), others quote the rates exclusive of service tax.

b. The rates quoted are standard rates applicable in case of a healthy male individual (non-tobacco user). In other words, while smokers and unhealthy individuals are usually charged extra premium (due to high mortality risk), women policy holders are offered discount from the standard rates (due to low mortality risk).

c. While comparing term plans of various life insurance companies, one should also ensure that age of the individual, sum assured, tenure / duration is same across all the plans.


8. Which is the best term plan available in the market?
Although term insurance plans are commoditized products (i.e., all the products available in the market are more or less the same), still you can choose the best one in terms of costs, duration, coverage. The best plan should be the least expensive while providing for maximum coverage and available for maximum duration.


In next part, I’ll tell about the practical tips on how to go about buying the best term plans.


Also see:
1. Most Amazing Fact about Life Insurance
2. Lesser Known Facts about Term Plans
3. Understanding Life Insurance