How Does Term Insurance Work?
What are Term Plans?
You may have many things in mind while going in for an insurance plan. You may want a plan that provides protection for family in case of death or you may want a plan that provides both death benefits and a savings account with cash value. Also, you may want to consider the expenses during the term of the insurance plan. In case you want a cheap insurance plan with death benefits, you may go in for a term life insurance policy.
How Term Plans Work
In case of term plans, if the Insured dies during the time period when the Policy is active, then a Death Benefit will be paid to the family. Otherwise no Claim is paid either to the person or to the family. Most of the time level term life insurance policies have a Premium that increases slightly over the years, taking into account the reducing value of money, increasing mortality Risk and also the additional costs or levies that might be imposed for a longer than normal guaranteed Coverage period.
Term life insurance or Term plans typically provide protection for a maximum of 30 years. You can have term plans with length of coverage of 10, 15, 20, or 30 years. There are a variety of term life insurance policies available that will cater to you and your family’s needs.
Types of Term Insurance Policies
There are three different types of term life insurance policies available.
- Level term
The term insurance that people purchase and use most frequently is the Level term insurance. The main attraction of this term insurance is that the rate and coverage amount remains the same for the entire period of the policy. Thus, the longer the term the premium is level for, the higher the premium amount you get.
- Decreasing term
Another kind of term life insurance policy is the Decreasing term life insurance policy that offers you coverage for a set term or period with rates that remain level, but the coverage amount decreases each year over the time of your policy. You are paid out a lump sum amount if you die during the policy term.
- Annual Renewable term
There exists a third type of term life insurance that offers you coverage that can be renewed each year, with the rates increasing each year. This type of arrangement is called the Annual renewable term life insurance and is the cheapest option available. This implies that the death benefit will only be paid by the insurance company only if the insured person dies within the coverage period of that year.
- Term Insurance With Return of Premium Option
Return of premium option in Term insurance plans offer to return the total premiums paid by you during the term of the policy in the event you outlive the plan. However, a without return of premium term insurance is a better option. You can either get a higher coverage in the same premium or same coverage can be bought at a lesser premium. You can use the premium thus saved to invest in any other investment scheme that will generate a better Maturity benefit.
- Liability Insurance
Term life insurance policies are liability insurance policies as they pay and render service on behalf of an insured for loss arising out of irresponsibility or negligence.