We come across several types of life insurance policies that often leave us confused. You must have come across something known as Term Insurance Plan and wondered what a term insurance plan is, and how it is different from other life insurance policies.
Before we show you the comparison between a term insurance policy and other life insurance policies, let us first tell you what a term insurance policy is.
A term plan is a simple straight forward life insurance plan which promises to pay a fixed defined sum of money, also known as the Sum Assured, if the insured (the person whose life risk is covered) expires during the plan term. If the insured survives the entire plan term no benefits are payable at the end of the plan term. Since the plan usually covers only death risk, the premiums comparatively are very low.
Now let’s take a look at what are other types of life insurance plans.
Other Life Insurance plans are generally a mix of life cover and endowment, in such plans insured receives a life insurance cover during the plan term and if he survives the plan term he is also eligible for a defined benefit at the end of the policy. .
So basically, the term plan is a kind of life Insurance that provides coverage for your life but has no maturity benefit. Whereas, in the case of other types of Life Insurance plans there is some amount of maturity benefit paid to the policyholder if he survives the entire policy tenure.
Though term plan is a kind of life Insurance that provides coverage for your life, deaths due to suicide in the first year of the policy is not covered.
- There are certain exclusions that you should know if you follow a certain lifestyle. For example, if you are a smoker, you should mention it in the policy. The insurance company will charge an additional premium to assess the risk of death due to smoking as smokers pose a great risk to insurance companies. If you conceal the information about your smoking habits, the insurance company may reject your claim.
- Suicide: No term insurance plan will accept the claim of a death due to committing suicide. It is placed under the exclusion list under the group insurance plan as well. In some cases, the insurance company will pay all the premiums paid by the policyholder until the date of death after deducting policy-related expenses.
Who should buy a term insurance plan?
Term Insurance policies are the best choice in the following situations –
- If you are looking for an insurance plan that will fit into your budget, go for term insurance policies as they come at a very less premium.
- If your income is in the mid-range or if you are the sole bread-earner, then term insurance policy is for you. You can take a large cover to protect your family’s financial future in case of your unfortunate demise.
- Persons on the threshold of new careers or business ventures can save on costs by buying term insurance instead of a endowment policy so that they can utilize their balance income or capital to develop their career or business.
- Term insurance can also be used by employers to provide life cover to their employees – particularly the labour class – as a welfare measure at low cost. The best thing about this is, these companies can later claim the paid premium as business expenses.
- If you are looking for a high life insurance cover for up to 70/75 years – term insurance is a good choice
Apart from a low premium, which is a huge plus point, a term life insurance plan comes with an array of interesting features as well. Let’s take a look at some of the features that will surely make you buy a term insurance plan.
Some key features of a term insurance plan are –
- Get more
Now term life insurance comes at a low premium, hence it is more affordable to opt for a larger life cover for the same premium that an endowment plan.
Death is not the only uncertainty of life: there are many more like Disability, Critical Illness, Terminal Illness and more. If you wish to enhance the efficacy of your term insurance plan, there’s always an option to attach riders to your current term plan. For instance, when you attach a critical illness rider, you will be entitled to receive the sum assured on being diagnosed with the critical illness. This is in addition to the death benefit of an equal amount on death over the term of the policy. You can opt for other riders such as loss of employment cover, disability cover, and waiver of premium cover, among others. Just make sure you select riders based on his specific needs to make the life cover more suitable and useful for you.
- Enhanced cover
The best part about term insurance policies is that you can enhance your life cover. A few insurance companies offer the flexibility to enhance the life cover during critical stages of the policyholder’s life. For instance, the policyholder may be permitted to enhance life cover some percentage at the time of marriage or while turning a parent. This makes it possible for you to begin with a modest cover and then enhance it as responsibilities increase as also the ability to pay a higher premium.
- Tax exemption
Premiums paid for all life insurance policies are exempted from tax up to a maximum of Rs 1 lakh under Section 80C of the Income Tax Act, 1961. The claim amount received by the beneficiaries or bonus in the hands of the policyholder is tax-free under Section 10 (10D) of the Income Tax Act.
- Secures your loans
Term insurance can also come to the rescue if you have taken a large loan such as housing loan, car loan etc. In addition, it is also useful for those who have invested substantially in new ventures by borrowing at high-interest rates or by mortgaging their property. Such persons can cover the risk of their dying before repaying all loans by taking term insurance which is cheaper than the other types of insurance.
Now the most important question – How to choose the best term insurance plan? Here are a few tips that will definitely help you in buying the right term insurance policy for you.
- Choose your cover amount wisely
Consider the life stage you are in, and the number of dependent members in your family. You must always take into consideration, not just your needs, but the needs of the entire family while choosing the right life cover. Remember, financial responsibilities of a single person are different from that of a married person with children. Make sure you consider the increasing financial responsibilities in the future.
- Maximise coverage by choosing the right riders
Apart from the death benefit extended by a term plan, you can opt for an additional cover by choosing riders such as disability cover, loss of employment cover, waiver of premium cover, can be added by paying a small amount of added premium. These riders add considerable value to the basic term plan purchased and are more beneficial for you.
- Lifestyle matters
The life cover largely depends on the type of lifestyle your family members follow. Assess the number of funds required to sustain your current lifestyle and then plan your life cover accordingly. Also, don’t forget to consider the inflation rate.
- It shouldn’t be based just on your income
Though it is suggested to plan a life cover based on your income, it’s wise to choose a life cover based on the needs of your family members. You should be sure that the life cover you choose would prove sufficient to pay the expenses of your entire family in the future.
- Don’t forget liabilities
Most of us have a few liabilities such as short-term loans, personal loans, home loan, car loan, etc. To avoid the burden of repaying these loans falling on your family, it is recommended you consider the outstanding loan amount while choosing the term insurance plan for you.
- Buy it online
You should always compare different policies online through various comparison portals. It is more convenient and economical as well. You can compare various products based on several factors such as price and other features. The best part about buying a term insurance policy online is the fact that there are no mediators involved and the decision made is unbiased; the products are not hard sold as they are when insurance agents are involved.
- Decide the tenure
Ideally, it is suggested that an individual should decide the policy tenure by taking into account the age he would want to retire at. It’s always best to buy a term insurance plan at a young age. Because more the age, more will be the premium you have to pay.
Once you have considered all the above points, the last step is to decide the premium cost you would want to pay. You can compare various policies at this time and make a decision. However, make sure you don’t compromise on any of the points mentioned above just because of cost.