Term Insurance: What Is It and How Does It Work? What Are Its Benefits?
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Term insurance is a pure protection life insurance policy. It provides coverage for a defined period in exchange for a specified premium amount. In case of an unfortunate event during this time-frame, the insurer provides a guaranteed# payout. It compensates your nominee for the loss of your income.
Affordability is a characteristic feature of term plans. Such plans do not include any investment component. The entire premium covers the mortality risk. Hence, term insurance provides sizable coverage at pocket-friendly rates. Thus, regardless of your budget, term insurance can cover your dependents’ financial necessities after an eventuality.
How Does A Term Life Insurance Policy Work?
The Agreement
A life insurance policy, including a term life insurance plan, is a legal agreement between you and the insurance company.You, the person who pays for the coverage, are the policyholder. You can buy the coverage for yourself or another family member. The person whose life is insured is the life assured.
You, the person who pays for the coverage, are the policyholder. You can buy the coverage for yourself or another family member. The person whose life is insured is the life assured. As the owner, you have to pay the insurer a pre-decided premium. The insurer pays a fixed death benefit to your nominee if a contingency occurs while the policy is in force.
Filling Out The Proposal Form
You need to disclose the following information in the term plan application form:
- medical history
- current health conditions
- lifestyle habits
- hobbies
- age
- annual income
- nature of your profession
Based on such data, the insurer assesses the probability of your family raising a life claim. Factors that can elevate the premium amount include:
- A higher age
- Unhealthy habits like smoking
- Risk-prone hobbies like skydiving
- Hazardous professions
- Chronic health problems
Assessing Your Requirements
- Decide your life cover: Your coverage should be enough to meet your dependents’ current living expenses and future needs. Children’s college fees, marriage, spouses’ old-age needs, and pending liabilities are some of the factors to consider.
- Choose your policy term: Work out the duration for which your loved ones will need financial support. It can be the time left until your children complete college or your retirement.
- Pick a premium payment mode: Term plans permit one-time payment of the entire premium. Or you can go for regular payments throughout the policy period or for a limited time-frame.
- Select the payout option: With a lump-sum payout, after repaying outstanding debts, your family can invest the rest. The returns can fund their living costs. However, if your family lacks financial know-how, you can opt for a combination of a lump-sum and a staggered payout. It ensures your loved ones never run out of funds.
- Look into riders: You can increase your base coverage with riders1 for a negligible rise in the premium. Such add-ons provide extra payouts, covering contingencies, such as deaths due to accidents.
Reviewing The Premium Quote
Based on your details, the insurer provides a premium quotation. When you make the payment, you get the coverage.
Covering Increased Insurance Needs
Increasing term plans enhance your coverage at defined intervals, overcoming inflation. Some term plans also allow you to add to your life cover at your life’s milestones when your obligations increase.
Assigning A Nominee
You need to name the person who will receive your term plan’s monetary benefits. It should be an immediate family member who will take care of your dependents.
Advantages Of Term Insurance Policy
Term Insurance Plans Are Very Simple To Understand
Simplicity is one of the reasons for the growing popularity of term insurance. Term life insurance is a pure life cover that focuses on offering your dependents the sum assured in case you were to die. All you need to ensure that the premium is paid on time.
Term Insurance Plans Are Supremely Affordable
The premium for a term life insurance plan is as low as 0.1 percent of the total sum insured. Now consider this, we pay about 2 percent of the car’s present value as its premium. Moreover, online channels provide an extra discount on your term insurance premiums as compared to offline channels.
Term Plans Offer Much Higher Coverage Compared To Traditional Plans
The total sum insured for traditional, ULIP or endowment policies is about 7 to 10 percent of the yearly premium. So for example, if you buy one of the plans mentioned above for a yearly premium of Rs 20,000, you get a coverage of Rs 2 lakh which will barely cover your family’s expenses for a few months.
Meanwhile, a term plan offers a much higher sum assured so that you can leave your family and dependents enough money that they don’t go through financial hardship in your absence.
Term Plans Come With A Host Of Tax Benefits
While the primary reason for buying term insurance is securing your family’s future, you also get to save tax with them. Let’s look at its 3 term life insurance tax benefits.
Section 80C: Under this section, you can claim a deduction up to Rs 1.5 for certain investments and purchases, that includes the premium amount you pay towards the term life insurance plan.
Section 80D: This exemption is allowed on the premium paid towards health-related coverage like critical illness riders. You can claim deductions up to Rs 25,000 for the premium paid towards it.
Section 10 (10D): In case of term life insurance, this benefit can be claimed while claiming the pay out. The entire amount is completely exempt from taxes.
Premiums Are Locked For The Duration Of The Plan
When you purchase a term insurance plan, you are effectively locking the premium you will be paying this year, next year, and every other year till the end of the plan. And this is where it becomes highly beneficial for you if you start your term plan as early as possible when premiums are lower at the younger ages.
Conclusion
Securing your loved ones against exigencies provides unmatched peace of mind. You can use a term life insurance plan to secure your family’s financial wellbeing. But to make the best use of this financial product, you need clarity on how term plans work. Then you can compare various schemes and understand the different conditions and exclusions. You can then select the one offering the maximum benefits at the lowest premiums.
