Check what is the right insurance policy to cover your loved ones

Covid-19 has made us realise how fragile human lives can be. It has also made us realise why term insurance policy forms an integral part of financial planning. While no amount of grief can erase the pain of losing a loved one,  financial protection at the right time can certainly offer some cushion to the bereaved family members.

If you are thinking of buying a term insurance policy, here is a primer on what is term insurance and its different types:

What is term insurance?

Term Insurance are pure protection plans under which only risk cover is provided. There is no saving element and therefore they are the cheapest plans. The premium amount of a term policy depends on various factors ranging from the sum assured, age, term of the policy and type of the policy. There is no amount paid on the maturity, as it only covers the risk of death.

Types of plans

Pure Term Plan: This is the simplest form of term insurance plan. This plan in return for a premium paid offers a fixed sum assured on the death of the policyholder. Nothing is paid back if the policyholder survives the policy years.

Return of Premium Plan: These plans as the name suggests, pay premiums back at the maturity of the policy. The plan is for those who want a premium amount back on the survival of the policy. But it is important to know that they are costlier than pure term plans and are not recommended by professional advisors.

Decreasing Plan: This is the type of term insurance where the sum assured decreases every year. For example, the term insurance sold along with a home loan is a decreasing plan, where the risk cover decreases with the outstanding loan amount. Considering the sum assured decreases every year, the premiums on these plans are lower than that of a level term plan.

Increasing Plan: These are term plans under which your sum assured increases every year to keep pace with rising inflation rates. Here the sum insured generally increases by around 5% until your sum insured doubles up or is increased by 50%.

Convertible Plans: Here, the policyholder can convert a term policy to an endowment policy during the term of the policy. After exercising the option it works like an endowment plan and assumes all its benefits and features. Moreover, you are eligible for an endowment insurance plan with a maximum cover of your original term plan. For example, if you bought the 25-year term plan and convert it into an endowment plan after 5 years, then the tenure of the converted policy cannot be more than 20 years. Unlike pure term plans, endowment policies are investment cum protection plans, which pays a lump sum amount on maturity of the policy.

Though there are so many options to choose from, it is best to go with a pure term insurance plan with an adequate cover size.