Term Policy
From Financial Literacy Wiki
Term policy offers coverage at a low cost and appeals to individuals with low budgets. A term policy provides cover against death and total permanent disability (TPD) for a limited term only. Riders can also be attached to the policy to the policy to extend coverage to major illnesses as well. A rider is a supplementary policy that "rides" or attached to the basic policy and will be terminated should the basic plan be terminated.
Term insurance has low premiums because the policyholder pays premiums only for coverage within the covered duration or term without any savings or investment features at all. In the event of death or TPD, the insurance company pays out the sum assured to the policy holder or his beneficiary. If the insured person survives the covered period, the policy is terminated and no payment is made to the policyholder with the exception of return of premium (ROP) term plans.
Level and Decreasing
Term insurance are generally either level term or decreasing term coverage.
In a level term policy, the sum assured is fixed and does not change throughout the term of the policy. In contrast, a decreasing term policy has a sum assured that decreases annually until it reaches zero at the end of the coverage period.
Level term is usually used to provide cover for life insurance on the basis of providing cover against the loss of economic life by putting aside a sum of money for the insured's family. Reducing term is usually used to provide cover against some financial obligations that decreases over time like loans. A mortgage reducing term is such an example where the financial obligation reduces over time and the amount of cover needed is correspondingly reduced as well. The rate of decrease in cover is not necessarily the same as the rate of paying down the loan. The basis of a reducing term is to ensure that the insured's family is not burdened with the outstanding financial obligation.
It is therefore important to note the purpose of getting an insurance policy and the basis of the recommendation.
Convertibility and Renewability
Convertibility is an option (usually as a rider) where the policyholder is allowed to convert the policy into an endowment policy or a whole life policy without medical underwriting. However, the premiums of the new policy will take reference to the insured's age where the conversion takes place. What actually happens is that the insurance company will issue a policy of the same or lower sum assured without requiring the life assured to declare a clean bill of health.
Renewability allows the policyholder to renew the term insurance for a fixed period without medical underwriting when the term expires. Similarly, the renewed policy premiums will take reference to the insured's age when the renewal takes place.
In both cases, as the insured will be older when either option takes place, an increase in premiums will be expected and proper financial planning should be done before this option is taken up.
