Insurance is one of the many investment options that are a must in any person’s portfolio. Many people, especially young investors, think insurance to be an unnecessary expense whereas it is a very important investment which gives maximum benefits when invested at the earliest.
There are many types of insurance that can be bought by eligible persons depending on the type of cover needed. Given below is the meaning of term insurance and a few relevant details of the same.
What is the term Insurance?
Term insurance is one of the most common and easiest forms of insurance available to individuals. It is the simplest form of life cover provided for a fixed tenure. This type of cover does not provide any maturity benefits. In the event of the death of the insured person, the death benefits are provided to the nominee or the legal heir of such person.
What are the features of term insurance?
The words term insurance and life insurance are often interchanged and not many people understand that term insurance is one of the types of life insurance policies. There are multiple features that make term insurance an attractive option for the majority of people. Some of such features are discussed below.
1. Life Insurance for a fixed tenure
Term insurance provides the benefit of life cover for the insured person for a fixed tenure. This tenure can be from 5 years to 40 years. The premium amount for such plans is comparatively lower.
2. Additional riders
There are many additional riders that can be available on basic term insurance plans. These riders can be bought at a relatively lower cost on existing premiums as compared to a new insurance policy for the specific need.
3.Varied payout options
Term insurance also provides the benefit of lump sum payout of the death benefit or even a staggering payout. This payout can be a monthly payout option or a portion of a lump sum payout along with an annual or monthly payout depending on the agreement between the insurer and the policyholder.
An important benefit of having a term insurance plan is the tax deductions. Many of the young investors invest in life insurance plans with the sole aim to save tax rather than provide financial security to their dependents.
The first and foremost tax benefit of investing in term insurance or any other life insurance plan is the deduction on the premium amounts up to Rs. 1,50,000 under Section 80C. Another tax benefit is in the form of exemption under section 10(10D) with respect to the death benefits received by the nominee or the legal heir of the insured person.
What are the types of term insurance plans?
Term insurance, although is the basic form of life insurance, there are many types of term insurance plans that can be bought by eligible applicants. Some of the common types of term insurance plans are mentioned below.
1.Level Term plans
Level term plans are the basic form of term insurance plans where the sum assured remains constant throughout the policy term. Such sum assured is paid in the unfortunate event of death of the insured person.
2.Term insurance plans with return of premium
This plan is a modified version of the basic term plan. One of the biggest concerns of the term insurance subscribers is the lack of maturity benefits at the end of the policy tenure. This concern is resolved by this type of term insurance plan that returns the premium amount paid at the end of the policy term if no claim is made by the policyholder.
3.Increasing term plan
An increasing term plan is the type of term insurance plan that lets the policyholder increase the amount of sum assured by a fixed amount or percentage every year. Upon the death of the insured person, the death benefits given to the nominee or the legal heir are at an increased amount.
4.Decreasing term plan
A decreasing term plan is the opposite of the increasing term plan where the sum assured in the term plan decreases every year. This decreasing amount of sum assured is usually attributed to an outstanding loan. The amount of death benefits available to the nominee or the legal heir is the reduced sum assured in the year of death of the insured person.
5.Convertible term insurance plans
Convertible term insurance plans are dynamic term insurance plans that allow the policyholder to convert a type of term insurance policy to another at any future date during the tenure of the policy. Such plans help the policyholders change and adapt the term insurance plans to their respective needs as per the need of the time.
What are the common riders available on term insurance plans?
Term insurance plans being basic life cover plans provide only death benefits to the nominee or the legal heir of the insured person. However, there are many additional benefits that can be included in the basic term insurance plans in the form of riders. Some of the common riders available on term insurance plans are mentioned below.
1.Critical illness cover
This type of rider provides additional cover in case of a pre-listed or pre-defined list of critical diseases or illnesses. This list is different for every insurer depending ion their guidelines. If the insured person gets diagnosed with any of the illnesses from this list, they get an additional cover usually in the form of a lump sum amount.
2.Accidental death cover
Accidental death cover provides additional cover in the form of the death benefit in case of accidental death of the insured person. The amount received by the nominee or the legal heir is the basic sum assured and the amount covered under the accidental death rider.
3.Accidental death and disablement cover
Under this type of rider, an additional benefit is provided in case of accidental death or temporary or permanent disablement due to the accident. Such additional benefit is provided in the form of a lump sum amount or weekly, monthly payouts.
4.Premium waiver rider
This rider provides the benefit of waiving off the premiums to be paid for the policy in the event of the death of the policyholder. This is especially beneficial in cases where the policyholder and the insured person are different. Under this rider, upon the death of the policyholder, the future premiums are paid by the insurance company to keep the policy active till the tenure of such policy.
5.Terminal illness rider
This type of rider is similar to the critical illness rider where additional cover is provided in case the insured is diagnosed with any of the critical illnesses predefined by the insurer. Unlike critical illness cover, there is no predefined list of illnesses issued by the insurer. The cover under the rider is provided immediately upon diagnosis which can help them meet the financial burden of dealing with the terminal illness.
Who are the target customers of term insurance plans?
Life insurance is essential for every individual to secure the future of their family in the event of the death of the insured person. Life insurance becomes especially important in case of the families having a single breadwinner or have many financial obligations that have to be met. The premium on term insurance plans is quite low and hence insured persons can opt for a high coverage amount. This makes it affordable for the vast majority of the population who may not be able to afford the various unique and dynamic life insurance products provided by insurers.
What are the points to consider while buying a term insurance plan?
Choosing the right term insurance plan is quite essential for every person. However, there are many factors that have to be considered while choosing the right term insurance plan from the various insurers. Some of such factors that require due consideration are mentioned below.
- The amount of coverage provided by the insurer is the primary consideration for every person.
- The premium to be paid for such cover has to be affordable and the frequency of payment of such premiums has to be flexible to match the needs of the policyholder.
- The riders available on the term insurance plans should allow the benefit of maximum coverage along with the sum assured.
- The term insurance policy should be flexible enough to ensure that it can be customized to meet the needs of the insured person.
- Another important factor to be considered is the claim settlement process and the claim settlement ratio of the insurer. The insurer having the maximum claim settlement ratio and the simplest claim settlement process should be preferred by the applicants.
Term insurance plans are an effective and easier way to secure the future of the family at a relatively cheaper rate. The various riders that are provided by the insurers ensure that the coverage is enhanced than that provided under the plain vanilla term insurance. This type of plan allows the maximum number of people to have a good life insurance plan and get benefits of the same.
1. What is the basic difference between term insurance and a health insurance plan?
A. A term insurance plan provides life cover and death benefits to the nominee or the legal heir whereas a health insurance plan provides coverage for medical expenses as well as pre and post hospitalization expenses of the insured person.
2. Is it necessary to compare the term insurance plans before selecting one?
A. Yes. Every insurer has its own set of guidelines that determine the amount of coverage that can be provided as well as the premium amount to be charged and other relevant factors like riders, number of persons to be included in the plan. etc. It is therefore essential to compare the plans to get maximum benefits for the insured person and their family in the unfortunate event of their death.
3. What is the tenure of a term insurance plan?
A. The tenure of a term insurance plan ranges from 5 years to 40 years based on the insurer’s guidelines and the profile of the insured person.
4. What is the biggest limitation of a term insurance plan?
A. One of the biggest limitations of a term insurance plan is the lack of maturity benefits. However, there are modified versions of basic term plans that provide a return of premium amount if no claim is made. Such options can be opted by people to avoid this limitation i.e., the loss of maturity benefits.