Term insurance plans
Term insurance is valid only during a certain time period that has been specified in the contract. The term can range from as short as it takes to complete an airplane trip to as long as forty years.
Protection may extend up to age 65 or 70. One-year term policies are quite similar to property and casualty insurance contracts. All premiums received under such a policy may be treated as earned towards the cost of mortality risk by the company. There is no savings or cash value element accruing to the insured.
a) Purpose
A term life insurance fulfills the main and basic idea behind life insurance, that is, if the life insured dies prematurely there will be a sum of money available to take care of his/her family. This lump sum money represents the insured's human life value for his loved ones: either chosen arbitrarily by self or calculated scientifically.
A term insurance policy also comes handy as an income replacement plan. Here in place of payment of a lump-sum amount to the dependents, on the happening of an unfortunate death during the term of the policy, a series of monthly, quarterly or similar periodical pay outs for a pre-defined duration may be provided to the dependent beneficiaries.
b) Disability
Normally a term insurance policy covers only death. However, when it is purchased with a disability protection rider on the main policy and if someone were to suffer such a catastrophe during the period of term insurance, the insurance company will provide a payout to the beneficiaries/insured person. If the insured dies after the term ends, there are no benefits available as the deal is over as soon as the term expires.
c) Term insurance as a rider
Protection under term life is usually provided as a stand-alone policy but it could also be provided through a rider in a policy.
Example
A pension plan may contain provision for a death benefit to be payable in case one dies before the date when pension is to start.
d) Renewability
The premiums are generally charged at a fixed annual rate for the whole duration of term insurance. Some plans have an option to renew at the end of the term duration; however, in these products the premium will be recalculated based on one's age and health at that stage and also the new term for which the policy is being renewed.
e) Convertibility
Convertible term insurance policies allow a policyholder to change or convert a term insurance policy into a permanent plan like "Whole Life" without providing fresh evidence of insurability. This privilege helps those who wish to have permanent cash value insurance but are temporarily unable to afford its high premiums. When the term policy is converted into permanent insurance the new premium rate would be higher.
f) USP
The unique selling proposition (USP) of term assurance is its low price, enabling one to buy relatively large amounts of life insurance on a limited budget. It thus makes a good plan for the main income earner, who wishes to protect his/her loved ones from financial insecurity in case of premature death, and who has a limited budget for making insurance premium payments.
Benefits of term insurance:
- Low premiums: Term insurance has lower premiums than other types of life insurance, such as endowment or whole life plans. This is because term insurance only covers the risk of death and does not have any savings or investment component. You can get a high sum assured at a low cost and protect your loved ones from financial hardships.
- High coverage: Term insurance allows you to choose a high sum assured that can cover your liabilities, such as loans, debts, mortgages, etc., and provide for your family's expenses, such as education, medical, household, etc. You can also increase or decrease your coverage amount as per your changing needs and life stage.
- Tax benefits: Term insurance premiums are eligible for tax deduction under Section 80C of the Income Tax Act, 1961. The death benefit received by the beneficiary is also tax-free under Section 10(10D) of the Act. This can help you save tax and maximize your returns.
- Riders: Term insurance plans can be enhanced with optional riders or add-ons that provide additional coverage for specific events, such as accidental death, critical illness, disability, etc. Riders can help you customize your plan and get more value for money. However, riders come at an extra cost and may vary from plan to plan.
- Flexibility: Term insurance plans offer flexibility in terms of premium payment frequency, policy term, sum assured, etc. You can choose a plan that suits your budget and lifestyle. You can also opt for online term insurance plans that are convenient, hassle-free and cost-effective.
Limitations of term plans
At the same time one must be aware of the limitations of term assurance plans. The major problem arises when the purpose of taking insurance cover is more permanent and the need for life insurance protection extends beyond the policy period. The policy owner may be uninsurable after the term expires and hence unable to obtain a new policy at say age 65 or 70. Individuals would seek more permanent plans for the purpose of preserving their wealth against erosion from terminal illness, or to leave a bequest behind. Term assurance may not work in such situations.
Term insurance is a must-have for anyone who has dependents or financial obligations. It can give you peace of mind and security that your family will be taken care of in your absence. However, before buying a term insurance plan, you should compare different plans from various insurers and choose the one that meets your requirements and expectations.