What are the Types of Term Insurance?
The most common types of term insurance are level term, increasing term, decreasing term, return of premium (ROP) term plans, whole life term plans, group term policies, and joint-life term insurance. Each type serves a different purpose, and has different benefits and limitations.
Introduction
The concept of term insurance is simple: it provides financial protection for a fixed period. If the policyholder passes away during this time, the insurer pays the sum assured (lump sum) to the nominee. If the policyholder survives the term, usually there’s no payout.
While the process is transparent, and affordable, we have found several customers who are confused about the type of term insurance that best suits their needs.
In this guide, we have compiled insights from Ditto’s IRDAI-certified advisors to help you understand:
- The different types of term insurance
- Their purpose, benefits, and limitations
- Factors to consider when choosing term insurance.
Confused about how to choose between the different types of term insurance? Book a free call now!
What Are the Different Types of Term Insurance?
Insurers offer multiple term insurance types customized to suit different needs. Let’s break them down:
- Level Term Insurance (Most Common)
- How it Works: The sum assured stays the same throughout the policy term. The premiums remain fixed, making it predictable and easy to understand and plan.
- Ideal for: Salaried individuals or anyone looking for a simple protection plan without too many moving parts.
- Drawback: Doesn’t account for inflation and there is no survival or maturity benefit.
- Example: ICICI Prudential iProtect Smart Plus and Bajaj Life eTouch II
Ditto’s Take: A well planned (accounting for future needs or inflation) level cover term plan is more than enough to meet the needs of most individuals.
- Increasing Term Insurance
- How it Works: The coverage increases every year, usually by a fixed percentage. It helps you tackle inflation and growing financial responsibilities.
- Ideal for: Young policyholders with increasing incomes and future family commitments.
- Drawbacks: Premiums are fixed and 30-50% higher than level-term plans depending on the structure of increase. Insurers cap the maximum increase to, say, 5% p.a. up to 100%, which limits flexibility. In addition, the increase in coverage under these plans is usually slow and gradual.
For instance, if you actually need a ₹2 crore cover, opting for a ₹1 crore plan that grows to ₹2 crore over 20 years is not ideal, because you stay under-insured for a long time.
- Example: HDFC Life Click2Protect Supreme offers 5% (each year) and 10% (every 5 years) up to 100% increasing term options across its plans.
- Decreasing Term Insurance
- How it Works: The sum assured reduces annually and is aligned with a declining liability like a home loan. The premiums are generally 20-30% lower than level and increasing cover plans.
- Ideal for: Those looking to protect a loan, mortgage, or other debts that reduce over time.
- Drawbacks: Coverage is reduced every year in a rigid manner, which makes it unsuitable for long-term family security. The plans offer no flexibility in increasing coverage later.
- Example: HDFC Life Click2Protect Supreme offers a decreasing cover option, called the Life Goal Variant.
- Return of Premium Term Insurance (TROP)
- How it Works: If you survive the policy term, your base premiums are refunded.
- Ideal for: Low risk-takers who prefer some guaranteed return.
- Drawbacks: Premiums are 60-100% higher than other regular term plans. Returns aren’t interest/profit-bearing and the rider premium is not returned either, so your money loses value over time.
- Example: Axis Max Life and Tata AIA offer TROP with comprehensive coverage.
- Whole Life Term Insurance
- How it Works: This plan extends protection till the age of 99 or 100 years, essentially covering your entire life.
- Ideal for: Individuals who want to leave behind a legacy or estate for their dependents. Parents caring for special needs (lifelong dependents).
- Drawback: It may be unnecessary if you and your dependents become financially independent earlier in life. And although it guarantees long-term coverage, the premiums are more than two times higher than term plans till the age of 60-70 years.
- Example: TATA AIA Maha Raksha Supreme Select
- Group Term Insurance
- How it Works: It is offered by employers to their employees or banks to their account holders. It provides life cover to a group of individuals under one umbrella plan.
- Drawbacks: Its coverage is limited, not in your control and non-transferable if you leave the group or organization. Several banks and NBFCs also sell credit-life or Home Loan Protection Plans (HLPP) bundled with loans. While these offer cover for the loan amount, they are expensive and non-transferable.
- Joint Term Insurance
- How it Works: This term insurance plan for couples covers spouses under a single policy. In case either partner passes away, the surviving partner receives the sum assured.
- Ideal for: Married couples with shared responsibilities.
- Drawbacks: A larger payout is possible only after the primary spouse’s death. If the order of death changes, the surviving spouse may get a lower payout than expected. In many joint-life plans, the amount paid after the first death is smaller than the actual cover chosen for that spouse. Moreover, riders are available only for the primary policyholder.
- Example: PNB MetLife Mera Term Plan Plus (spouse coverage) and Aditya Birla DigiShield- Joint Life
- Zero-Cost (Smart Exit/Special Exit) Term Insurance
- How it Works: Not a separate type per se, because it comes as an inbuilt feature. If you exit the policy early, you get a refund, usually within the specified tenure.
- Ideal for: Individuals who want flexibility without feeling like they’re losing money.
- Drawbacks: The “no-cost”benefit applies only when specific conditions are met, and these exit-refund conditions can be quite restrictive. This includes choosing a term plan for a specific tenure, generally 40 years and above, which can indirectly lead to higher premiums.
- Example: HDFC Life, Axis Max Life, Bajaj Life, and ICICI Prudential provide zero-cost features with their flagship term plans.
- Term Insurance for Housewives
- How it Works: Though not a typical one, the plan is still the same as a regular term plan. The only difference is that it considers the income/existing term cover of the husband.
- Ideal for: Specifically designed for homemakers, the sum assured of which is linked to the income of the working spouse and capped to a maximum of ₹1-2 crores.
- Drawbacks: Limited coverage amount compared to working individuals. It requires the spouse to have an existing life insurance policy (in most cases).
- Example: ICICI Prudential iProtect Smart Plus provides coverage up to ₹1 Crore or 50% of husband’s coverage, whichever is lower.
Factors to Consider While Choosing the Right Term Insurance Type
Life Stage and Financial Goals
Young buyers can choose simple level term plans, while couples or parents may choose joint or whole Life insurance plans for long-term needs.
Current Income and Expenses
Your term plan must fit your budget without straining your monthly expenses. Start with basic coverage and upgrade as your income grows.
Dependents and Future Liabilities
If you have dependents or long-term loans, choose a policy term that covers their full financial need timeline.
Premium Affordability
Pick a premium that remains sustainable even as your financial situation changes and always compare premium-to-benefit ratios to avoid overpaying.
Flexibility and Rider Options
Choose a plan that allows you to add riders like critical illness or accidental disability benefits as your responsibilities grow.
Pro Tip: It’s always wise to review your term insurance needs every few years, especially after major life events like marriage, childbirth, or buying a house.
Why Choose Ditto for Your Term Insurance?
At Ditto, we’ve assisted over 8,00,000 customers with choosing the right insurance policy. Why customers like Venkatesh love us:
- No-Spam & No Salesmen
- Rated 4.9/5 on Google Reviews by 15,000+ happy customers
- Backed by Zerodha
- 100% Free Consultation
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Ditto’s Take on Types of Term Insurance
Different types of term insurance serve different purposes, whether it's maximizing pure protection or getting your premiums back at the end. Always consider your age, income, liabilities, dependents, and how long you need coverage when choosing a plan. A young salaried professional might opt for a level-term plan with a longer tenure, while someone with a non-working spouse (homemaker) may prefer term insurance for housewives.
Finally, while term insurance is straightforward, it's still a huge financial decision. Always consult a licensed financial advisor before proceeding with a policy. If you choose the right plan today, it will offer your family the peace of mind they need tomorrow.
Frequently Asked Questions
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