To be very true, term plans are the best insurance plans you can currently buy for true worth of your money.
Term plans are essentially insurance plans that run over a period of time, normally the insurer’s lifetime. However, since most insurers tend to outgrow the term they applied their insurance for, or tend to benefit more from their policy in the short-run too, with time term plans have now diversified into ROP term plans and Endowment Term plans.
In this blog, we will look at the difference between the three types of term plans to help you understand the intrinsic differences amongst the three to help you make a smarter choice between them. Let’s start with an overview of all the plans:
General Term Plans (Basic Life Insurance)
A term plan is an insurance policy that offers a death benefit (sum assured) to the nominee or beneficiary of the policyholder. The death benefit is adjudged when the policy is applied for.
- Normally, suicides are not covered in this life insurance scheme until the 2nd year onwards. If the policyholder is still alive at the end of the term applied for, there is normally no benefit.
- However, the money you invest into it comes back to you with no income tax cuts under section 80c of IT act.
- The tax exemption proceeds are given to the nominee in case of death of the policyholder. Ideally, you should opt for life cover of at least 15-20 times your annual income so that the sum assured takes care of all possible needs of your beneficiary and your immediate family.
- Normally, women and non-smokers are given preferential premium rates with a higher sum assured.
Term Plan with Return of Premium (ROP)
This insurance plan is very similar to an endowment plan. Endowment plans normally differ from basic term plans in one very critical aspect i.e. the maturity benefit.
- Unlike term plans, the sum assured is paid out in circumstances, death and survival. This way, the insurer does not lose out on premium payments and their value.
- However, in this kind of policy, the fees and expenses are covered in higher premiums in order to pay out the sum assured with profits.
- The profits are generally an outcome of the premium amount you deposit that is invested in various asset markets like equities and debt. In these plans, premiums are normally decided according to the age of the person. Such plans normally feature terms between 15 years to 20 years.
- However, you can opt to increase it until 65 years to 70 years (if you think you will die at that particular age).In case of survival, the policyholder might not get the coverage at the earlier rate of decided premiums after the expiry of the policy’s term.
- The policy buyer now has to either obtain extended term coverage with a different payment option or forgo the entire coverage to make a fresh start.
Term Plan With Monthly Income (TROP)
This term plan is similar to a ‘money back or pension plan policy’ in which the insurer is paid a certain amount each month of the year as living expenses.
- This system of making periodic payments to the insurer over the entire policy term (from the sum insured) helps people, especially older people to meet daily expenses and the cost of living.
- This payment of the long-term sum insured (like in term plans with ROP) in regular intervals is also beneficial as the rest of the balance of the sum assured will be paid to the policyholder if he/she survives the period of the term.
- In case of his/her death, the beneficiary gets the full sum assured instead of only the balance amount.
Now that you have understood how different these plans really are. Let’s see how these plans fit into your life…
- In case you are a salaried person in your 30s or 40s, you should opt for a general term insurance so that your salary covers yours and your family expenses and you can also pay out the premiums for the policy. Since you are already working, you do not currently need ROP plans or plans that give you a monthly income.
- In case you are a person who is working from home (self-employed) with an uncertain income or if you are disabled and you constantly need money for expenses and your medical insurance does not cover your medical condition, you can opt for an ROP term plan, which will give you money based on the profits from share markets to help you earn a little bit of money at regular intervals.
- In case you are an old-age person, who is retired or living at the behest of their child/children’s money, you can opt for a term plan with a monthly income that helps you meet most of your monthly expenses with your own money according to the monthly pension that you get from the insurance company. This way, not only will you be financially secure, you will also not have to beg for money to fulfil your desires at a very old age.
We hope this comparison was helpful to you and that you make a choice according to your age and current income status. Do not opt for the wrong policy and repent later. This guide is enough to tell you gauge all the pros and cons of each policy.
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