What is Term Insurance?
Term insurance is a type of life insurance policy that provides coverage for a certain period of time, or a specified “term” of years. If the insured dies during the time period specified and the policy is active, or “in force,” then a death benefit will be paid.
Term insurance is initially much less expensive compared to permanent life insurance, such as whole life and universal life. This is because it’s not designed to last through old age, which is when life insurance premiums are the most expensive. And, unlike most types of permanent life insurance, term life insurance has no cash value.
There are various types of term insurance policies available. Many policies offer level premiums for the duration of the policy, such as 10, 20, or 30 years. These are often referred to as “level term” policies. A premium is a How Term Life Insurance Works specific cost, typically monthly, that insurance companies charge policyholders to provide the benefits that come with the insurance policy.
The insurance company calculates premiums based on health, age, and life expectancy. A medical exam that reviews the insured person’s health and family medical history might be required, depending on the type of policy chosen.
Premiums are typically fixed and paid for the length of the term. If the person insured dies prior to the expiration of the policy, then the insurance company will pay the death benefit to their beneficiaries. If the term expires and the individual dies afterward, there would be no coverage or payout. However, the policyholder can often extend or renew the insurance, but the new monthly premium will be based on the person’s age at the time of the renewal. As a result, premiums are higher upon renewal.
Benefits of Term Insurance Plan
Term insurance plans offers several benefits to its policyholders, such as:
Cost-Effective:One of the best features of a term insurance plan is that it’s quite light on pocket. It provides huge life coverage at quite affordable premium cost.
Pure and Simple Product:Term insurance plan is referred to as one of the most simple and basic insurance products with easy-to-understand features. A standard term insurance plan is a pure protection term plan which contains no complex features of the investment component and only provides high life coverage to the nominee of the policyholder, upon the demise of him/her. So, you pay the premiums and get the coverage for your life for a fixed policy duration.
Helps in Fulfilling Financial Obligations: A term insurance plan helps your family to meet your financial obligations, when you are no more. These plans help your family in a big way from unpaid loans, EMIs, debts in your absence. Thus, being an earning member of a family, it is prudent to purchase a term plan at the right age to secure your family’s future.
Various Options to Receive Death Benefit Payouts:A term insurance plan offers high coverage to the nominee or the family members of the policyholder, if they aren’t able to survive the policy term, via various payout options. Your dependents might receive a lump sum amount to manage the financial liabilities such as loan or any sort of mortgage, or, might receive a death benefit payout as monthly income which helps them to manage the regular and day-to-day expenses.
Receive Longer and Higher Life Coverage: Generally, most of the term insurance plans offer whole life coverage up to 99 years of age and also provide higher sum insured such as INR 1 crore/INR 2 crore /INR 5 crore /INR 10 crore and so on.
Term Plan with Return of Premium Option:Term insurance plans are designed as standard and also come with an interesting feature of “Return of Premium” or ROP option which are popularly called as “TROP”. It is different from pure term plans as pure term insurance plans only provide life coverage to the policyholder’s family in the case of the former’s demise during the tenure.
Whereas, TROP is highly beneficial as it refunds all the premium paid as maturity or survival benefit, if the policyholder is able to outlive a term insurance plan term. The policyholder is eligible to receive: 105% of the total premiums* paid at the end of the policy term as a refund.
ROP term insurance plans are slightly more expensive than standard term insurance plans but returns back your premium, if you survive more than your policy term and thus ensures continued protection. Investing your money in a TROP is able to provide 100% protection to you and your family and also provides extra benefits such as in-built terminal illness benefits or optional riders such as waiver of premium, disability benefit and critical illness benefit and so on.
Different Variations of Term Insurance Plans:
Other than TROP plans, insurance companies provide other different variations of term insurance plans which offer more than just death benefit and can be beneficial if purchased at a younger age. Plans such as level term plan, increasing/decreasing cover plan and convertible plans are varied in terms of premiums, sum assured coverage and payouts.
Option to Enhance Protection with Riders: The policyholder has the full flexibility to add optional riders such as critical illness coverage, accidental death benefit. The former offers lump sum payout on the diagnosis of any covered critical illness and the latter provides protection against any mishaps in future. Moreover, term insurance plans also offer guaranteed lump sum payouts on the diagnosis of any kind of listed terminal illnesses such as AIDS or advanced stage of cancer and heart disease.
Flexibility in Premium Payment: A term insurance plan is designed in a way to provide utmost flexibility to its policyholder not just in terms of benefit payouts but also provides options in premium payment. The policyholder can pay their premium on a monthly, quarterly, half-yearly and yearly basis. This flexibility helps policyholders to pay their premium amount as per their convenience without muddling their other financial commitments.
Provides Tax Benefits:Term insurance plan also offers tax benefits as premiums are paid under Section 80C of the Income Tax Act 1961. The premium paid attracts tax deduction up to a limit of INR 1.5 lakh in a year. Moreover, the death benefit payout which is received under the term plan insurance is fully exempted, under Section 10 (10D) of Income Tax Act 1961.
Other than this, if a policyholder opts for a critical illness rider along with term insurance plans, then they can avail tax benefit on premium paid under 80D.
Example of term insurance
Buying the same 1 cr Term Protection at age 25 will cost substantially lower Premiums than at age 35.Buying insurance at an early age will help bring down the total costs significantly. What's more, once these premiums are locked in, they remain the same throughout the term!
For example, a Term Life Insurance cover of 1cr till age 75:
-A 25-year-old needs to pay a yearly premium of Rs 8,000. (Shell out 4 lac next 50 years)
-A 35-year-old needs to pay a yearly premium of Rs 15,000. (Shell out 6 lac next 50 years)
Term insurance premiums rose by nearly 90% for first-time buyers! So, by buying early, you can even dodge frequent price hikes by insurers. If the base policy provides a ₹ 1 crore sum assured and an accidental death benefit rider is added to it, then the nominee will receive an extra ₹ 50 lakh in case of an unfortunate event of your demise due to an accident. This will enhance your overall coverage to ₹ 1.5 crore.
