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3 reasons why term plans make sense
Sunil Dhawan, Outlook Money
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July 10, 2007

Here's a small quiz question, "Which is the ideal category of life insurance policies?" For regular Outlook Money readers, the answer is a sitter: term plans. Term plans give you high coverage for the lowest premium during their tenure.

These are characterised by low premiums and free your funds so that they can be deployed in high-return options such as equity mutual funds. For those who like to be hands-on with their investments, this appears to be a superior route since it gives coverage and returns higher than investment-cum-insurance policies such as endowment policies.

Unit-linked plans are more investment vehicles than insurance covers given the low coverage they provide, although deductions for life cover are made from the premium.

"I know this. What's new?" you might ask. Well, you can use term plans to even greater effect if you understand them well and adapt them according to the circumstances in your life. Here are three moves that can give you the term plan edge.

1. Increase, decrease or terminate term cover according to situations. Go for term plans without return of premium as they would be the cheapest plans. As insurance is meant to replace your current and future income to fulfil the needs of your dependents, keep increasing the cover by buying new plans at important life stages such as marriage or childbirth.

Try to ensure that the cover lasts till your working life. Most plans provide insurance cover till age 65 or for a maximum term of 30 years. You also need to buy insurance as early as possible (provided you have or plan to have dependents) to avail the low premiums offered to younger people. But the story doesn't end here.

With time, as your income increases and you accumulate assets, the tenure and quantum of life cover will need periodic reviews. Also, inflation would have substantially eroded the purchasing power of the cover in the second half of the term.

It would make sense to not continue covers if your assets have built up and liabilities declined. For instance, your children could have settled. Discontinuing the cover will not be a problem as returns or surrender value were not expected in the first place.

2. Use a term plan to cover your home loan. Home purchases are typically funding by a loan. The loan repayments usually last the better part of one's working life. In case of the borrower's untimely death, his dependents will lose possession of the home if the loan repayments stop. It is here that low-cost, high-cover term plans can step in - their proceeds can be used to pay the remaining part of the loan.

3. Use a term plan to cover shorter-term loans. This is something that a lot of people may not be aware of. You can use shorter-term term plans, say, of two years, to cover other loans such as those for cars or for business equipment. You can discontinue the term covers when the loan's tenure gets over.

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