The purest form of Life Insurance is called Term Insurance Plan. It is basically a Pure Protection Plan; usually with no element of savings or investment attached to it. In Pure Term Plans, if the Life Insured unfortunately dies within the policy term then the nominee will get the entire money that has been promised as the Death Benefit for the life insured. However, if he survives that period, then there is no payment at the end of the term. Hence in Pure Term Insurance Plans, there is no Maturity or Survival Benefit. However there are many variations of Term Plan these days and there is even an element of savings attached even to Term Plans.
Insurance Premium would usually consist of 3 parts, namely Mortality Charge, Administrative Expenses and the rest is Investment. Mortality Charge is the charge paid to the insurance company by the policyholder for providing him with the assurance of the Death Benefit. Expenses are administrative costs for documentation, etc. and the remaining amount is invested for providing the Maturity Benefit, if any, to the customer.
Since Maturity Benefit is usually zero in Pure Term Insurance Plans, there is no requirement for Investment. Hence Term Plans are the cheapest plans in the industry with the highest possible cover. Thus, any person will be able to take a high cover for the protection of his family at a very nominal cost if he opts for a Term Plan.
Term Insurance plans have quite a few versions. There are:
Level Term Plans, where the life coverage remains the same throughout the policy tenure
Increasing Cover Term Plan, where the life coverage increases steadily at a certain fixed rate of about 5% every year
Decreasing Cover Term Plan, where the life coverage decreases steadily at a fixed rate till it reaches the threshold limit.
Joint Life Term Plan - where the policy covers the life risk of self and spouse or business partners under the same plan.
Term Plan with Return of Premium - This type of plan is a variation of pure term plans where the premiums are returned to the policyholder on survival throughout the policy tenure. Thus it removes the uncertainty of Term Plans but is more expensive than pure Term Plans with no maturity benefit.
Term Plans are very affordable with its low cost and high coverage. The usual customers for this plan would be someone who is the only earning member of the family and has a number of dependents or someone who has taken a loan. It is also beneficial for a high net worth individual that needs a very high cover himself. In certain plans the coverage can be increased after taking the policy also and hence can be availed by young individuals who do not have much liability now.