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  • Raghav Sand

Life Insurance: Whole Life and Term Plan

It is very important to understand the different types of insurance plans. Given the fact that life is very uncertain, insurance becomes essential for securing the future of our loved ones. There are basically two types of insurance plans – term and whole life.

A term insurance plan is actually a life insurance plan but for a fixed period of time (term). Once a person takes out a term insurance plan, she/he is insured for the term of that plan. In the event of the person’s demise within the term of the plan, the main corpus (sum assured) is paid by the insurer to the person’s nominee. However, no claim can be made if the person survives the term. Therefore, in a term insurance plan, there are no maturity benefits in case of survival of the term. Not being able to get the sum invested back after a certain duration may seem futile, but a term insurance plan gives higher coverage at an economical cost.

A term insurance plan is of three types – One-time premium payment term plan (in which the premium amount is payable as a one-time lump sum payment), Partial premium payment term plan (premium amount is paid in partial terms) and a regular premium payment term plan (premium amounts are paid in regular, periodic intervals. Some insurers have started giving back a portion of premium paid in term insurance plans.

Term vs.Whole Life Insurance. How to Choose
Image Courtesy: Insurance Geek

A life insurance plan, on the other hand, entitles the subscriber to a pre-decided and mentioned maturity benefit. Therefore, if the subscriber survives the term, she/he receives specific maturity benefit. In the event of the subscriber’s demise during the policy term, the main corpus (sum assured) is paid to the nominee(s).

Depending on the mode in which the corpus is built over a period of time, life insurance plans are of several types, namely:

  1. Money Back plans: In these plans, guaranteed returns are paid and the plans actually serve as a vehicle for both investment and insurance coverage.

  2. ULIPs (Unit Linked Insurance Plans): These plans combine the benefits of investment as well as coverage and come with a lock in period of 5 years. These plans offer tax benefits and are market-linked instruments with varied fund options from among which the subscriber can choose as per her/his own wish.

  3. Endowment plans: These plans offer guaranteed pay outs and come in two formats (with profit, where additional bonuses are paid and without profit, where no bonuses are paid).

  4. Whole Life Plans: These plans can be seen as endowment plans that come with long terms of up to 100 years. The main corpus (sum assured) is payable to the nominee(s) after the demise of the subscriber.

Determinants of Life Insurance Premium

  1. Age: Younger the age, lower the premium.

  2. Gender: Women pay lesser premium as they tend to live longer which means a longer premium payment duration.

  3. Medical history of the family: Instances of serious illness in the family increases the chance of recurrence.

  4. Smoking and drinking habit: People who consume tobacco and alcohol have a risk of life-threatening disease.

  5. Profession of insured person: People working in transportation, mining and construction sector have a higher risk from accidental death.

  6. Policy tenure: Long term policy has higher death benefit, hence the premium tends to be higher.

  7. Mode of buying policy: Buying through the offline mode will include agent commission and administrative costs. Online mode eliminates such incidental costs.

  8. Frequency of premium: Premiums paid on a frequent basis i.e. monthly and quarterly premiums are higher as compared to half-yearly and annual payments.

Determinants of the Term Premium in India

Do catastrophes influence term premia and their underlying determinants? Are term premia influenced by the effects of exceptional policy measures that tend to be taken in these overwhelming times or, do they remain impervious and continue to emit the signals that they typically do when all is well?

Monetary policy exerts an important influence on the term premium. In the context of contractionary monetary policy, a rise in the policy rate leads to an increase in short-term interest rates, but longer-term interest rates respond incompletely and with a lag. Hence, the term premium, which is the spread between long-term and short-term interest rates, gets compressed. Conversely, easy monetary policy would lead a rise in the term spread. A fall in inflation and easing of inflation expectations can lead to a decline in term premium. Rise in economic policy uncertainty increases risk and could lead to a rise in the term premium.

Source: Reserve Bank Of India

In India, factors such as turnover in the government securities market, inflation risk, foreign investment in domestic bonds and policy uncertainty have been found to influence the term premium. The size of the government’s market borrowing programme, foreign portfolio investments in the domestic bond market and foreign bond yields are also found to move domestic government bond yields.

Fears of excess supply of government bonds due to deviations from budgetary targets on account of an expansionary fiscal stance, first in the context of the slowdown in economic activity and then to fight the pandemic, and elevated inflation due to supply disruptions brought on by COVID-19 led to the rise in the term premium.

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