Term Insurance

Term insurance is a kind of life insurance that provides a predetermined amount of cover for a definite period of time. If the insured person passes away during the term of the policy, then the death benefit is paid to his beneficiary. Term plans are aimed specifically to provide for the family’s financial emergency in case of the death of the policy holder. There is no maturity benefit for the holder in case of his survival. The entire premium paid by the holder goes towards his cost of cover, and hence term plans are the cheapest life insurance options available, with the lowest premiums. The premium amounts on term plans can vary across companies, and increase with age, tenure of the policy, etc. Term plans are usually of 10 years, 20 years, 30 years, etc.  in tenure, but most of them can be converted to permanent life insurance policies if the holder wishes to do so.

The death benefit of a term insurance is paid to the nominee of the deceased, who is usually a family member. Many insurance companies give an option of receiving a either lumpsum amount at one go, or a partial amount as lumpsum and the rest in the form of a monthly amount, just like an income. Many policies also provide for partial and permanent disabilities where the policy holder can no longer earn the same income as before.

If the policy holder survives through the entire term of the policy, he will not get any maturity benefit. He can choose to forego the policy, or renew it. In case of renewal, there will be different payment options than earlier. The premium would usually increase due to age factor, and the payment options may also change.

Glossary of term insurance

Premium: Premium is the amount paid to the insurance company for getting a life cover. Premium could be paid annually, semi-annually, or a lumpsum one-time amount, depending on the policy.

Sum Assured: This is the amount that the insurance company will pay you if the event for which the insurance was taken, occurs. For example, in term insurance, the amount payable to the beneficiary on the death of the insured person is called the Sum Assured. It is also called Cover or Death benefit.

Term:  Term of a policy refers to the time period for which the policy holder is insured. It is generally 10 years, 20 years, 30 years, ow even whole life.

Survival benefit:These are benefits given by the insurance company if the insured person survives the term of the policy. Normal term plans do not provide survival benefits, but some companies have designed plans with features like premium refunds in case of survival to attract more customers.

Riders: These are extra protection facilities provided by the policy for an added nominal cost. Some riders that the insurance companies provide are accidental death benefit, critical illness, partial or permanent disability, waiver of premium, etc.

Factors that affect premiums

  • Age: Premium amount increase with age, so it is better to secure a term plan earlier to get the benefit of low premium.
  • Period of coverage: Longer period of coverage will have higher premiums than shorter periods.
  • Location: Premium amount is more for people residing in areas which are more disaster prone like tsunamis or earthquakes, or prone to geopolitical tensions or warzones.
  • Occupation: Being in certain occupations which could be considered dangerous like pilots, miners, fishermen, oil and gas drilling, etc. will have more premium payable than for those doing desk jobs.
  • Lifestyle habits:Certain lifestyle addictions like smoking, consumption of tobacco or alcohol reduce the longevity of an individual and hence if you have these habits you will be charged a higher premium.
  • Medical history of self and family: If you have suffered any serious ailments in the past, or are currently suffering from any conditions, like diabetes, your premium payable will be higher. People with diseases like cancer are not offered any plan at all. This will also be applicable if any of your immediate family suffers from chronic diseases which can be passed on genetically.
  • Sports/Activities:If you indulge in adventure sports or have risky hobbies like rock-climbing, motorsports, skiing, etc. your chances of meeting with an accident are higher. Hence you will be charged higher premium on term insurance.

Why Term Insurance?

Term Plans are the most basic insurance plans with no frills attached. There is no retrieval of premium in case of survival. On the other hand, there are many endowment plans which offer capital protection, returns, and insurance cover. Many agents and sales people advise on endowment policies for the above reasons, and discourage people from purchasing term plans. So why is it that term plans are still one of the most widely trusted form of insurance?

Firstly, because of the basic nature of this plan, it has the capability of providing a high cover with very low premiums. Endowment plans which offer returns along with insurance are costly in terms of premiums and do not provide sufficient corpus in case of eventuality. For example, for ₹8000- ₹ 10,000 premium per year, you can get a Sum Assured of ₹ 1 crore. But for the same premium in an endowment plan, the beneficiary would receive only ___________ amount as Sum Assured. This amount cannot be sufficient for the policy holder’s family to have a financially secure life in the absence of the deceased, or clear off any of his liabilities. Therefore,for the purpose of securing one’s future in case of an emergency/eventuality, term insurance is the best option.

Secondly, clubbing of insurance with investment has its own set of disadvantages. Due to the lock-in period of insurance, the investment also gets locked-in for a long tenure, which can be avoided by investing separately in Mutual Funds which give more flexibility. Also, endowment plans like ULIPs have a fixed set of funds from which the investor can choose one or two to distribute his money. This limits the options of investment, compared to a plethora of investment options available in the market otherwise.

One more advantage of term plans is that they have a low claim rejection percentage. If all the required documents are in place, and if there are no doubts or contentions on the cause of death of the policy holder, the claim amount is usually disbursed to the beneficiary.

FAQs

  1. What are the different modes of premium payment for term plans?

The policy holder can choose to pay premium monthly, quarterly, semi-annually, annually, or even a single, one-time premium, depending on the scheme and insurance company. Most holders opt for annual premium payment option due to tax benefits under section 80C.

 

  1. What are the tax benefits of paying term insurance premium?

All term insurance premiums are exempt under section 80C of the Income Tax Act up to the limit of 1.5 lakhs. This benefit can be claimed for premium paid for insurance of oneself, spouse or children.Also, under section 10 (10D), the claim amount received by the nominee or the bonus received by the policy holder is tax free.

 

  1. How is a term plan better than other endowment plans?

If the purpose of buying a policy is purely to provide for unforeseen eventuality, then term plan is your best bet. Endowment plans offer investment along with insurance, and hence people buy them to kill two birds with one stone. However, there are many investment options available in the market to suit your specific investment needs including debt, equity, mutual funds, etc. Due to dual objective, the sum assured of an endowment plan will be much lesser than a term plan, and in the time of death, it may not be enough to secure the financial needs of the family in the long term. Hence it is advisable to buy a term plan for coverage purpose and with the help of a good advisor like Finbingo, you can customize your investment portfolio separately.

 

  1. Can I convert my term plan to a whole life policy or an endowment plan?

Yes, most term plans give the holder an option to convert the term policy in any of the above plans without any additional costs.

 

  1. Can I surrender my term plan during its tenure?

Yes, you can do so, but there will be surrender charges on the same. There are no surrender charges after 5 years of holding policy.  However, one should not surrender the policy unless there is a dire need of funds. Surrendering policy before three years can attract a charge of at least 30% of paid premium.

 

  1. Why should I buy a term plan?

There are several reasons why one must go for a term plan:

  • Financial security: Term Plans can pay for the financial liabilities of the deceased person’s family for the long term.
  • High sum assured for low premiums; as against endowment plans which are costly.
  • Flexibility in paying premiums with respect to amount and frequency.
  • Term plans do not have any brokerage
  • Rate of rejection of claims is very low if all information is provided correctly.
  • Riders can be opted for, which provide additional benefit in case of critical illness, disability or accidental death.

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