What is Term Insurance & Why Should You Get One?
As the new year approaches, we thought it was vital to discuss a financial product you should consider buying. Our lives are so unpredictable, and it’s essential to have some form of financial protection. You may be the sole breadwinner in your family and constantly worry about the financial impact if something unfortunate happens to you. That’s where a Term Insurance policy comes in handy!
What is Term Insurance?
Term Insurance is a type of life insurance that provides financial protection for a fixed period of time. If the policyholder suddenly passes away during this period, their family members (or nominees) will receive a death benefit. Term insurance is a relatively low-cost way to ensure your family's financial security if something were to happen to you.
A 20-something-year-old healthy individual can essentially secure a cover of up to ₹1 crore for his dependents for the next 25+ years if he pays a fixed, minimal amount (even less than ₹500) every month to a reputable insurance company.
However, unlike whole life insurance, term insurance does not provide maturity benefits. The insurance company will not pay a lump-sum amount when your term insurance policy matures.
Why Should You Consider Term Insurance?
Here are some of the advantages of term insurance:
- Term insurance offers much higher coverage for a smaller premium than traditional or market-linked life insurance policies. [A premium is a specific amount a policyholder has to pay periodically (monthly or yearly) to maintain their insurance coverage.]
- It offers financial security for your loved ones. In the unfortunate event of your death, your family may face a financial burden of funeral costs, unpaid debts, and other expenses. A term insurance policy can cover these expenses and ensure that your loved ones are not left in financial trouble.
- If you are the primary breadwinner in your family, it means your income contributes significantly to the family's financial stability. If you become seriously ill or injured and are unable to work, term insurance can help your family maintain their standard of living.
- You can select optional riders (or extra policy provisions) to increase the standard term insurance benefits. For example, you can add a critical illness rider or plan if you’ve been diagnosed with a serious illness.
- You can also save money on taxes! The premium you pay for a term life insurance policy can be deducted (up to ₹1.5 lakh) under Section 80C of the Income Tax Act. A deduction of up to ₹25,000 is also available under Section 80D on premiums paid for term plans with a critical illness cover option. More importantly, the death benefit received under the term insurance policy is tax-exempt under Section 10(10D).
Types of Term Insurance
A single plan cannot accommodate everyone's requirements given the changing periods and circumstances. As a result, there are many term plans you must take into account while making financial plans or goals.
Level-term plans are the most fundamental and straightforward type of term life insurance. The sum assured selected at the start of the policy remains the same throughout the policy term. In the event that the policyholder dies, the nominees or beneficiaries will get the death benefit.
Increasing Term Insurance
Under this term plan, the coverage amount chosen at the start of the policy increases every year by a specific amount. A term plan with expanding coverage is beneficial in keeping up with inflation since it makes sure the family has enough money to survive. The premium for such plans is relatively higher because the policyholder has the opportunity to enhance the sum guaranteed.
Return of Premium Term Insurance
It is a type of insurance plan where, if you outlive the policy term, you get back all the premiums you paid. It's like getting your money back if nothing unfortunate happens during the coverage period. You are eligible to use this option only if you haven't filed any claims throughout the policy's term.
Decreasing Term Insurance
In this type of policy, the sum guaranteed is reduced at a certain pace as the policyholder becomes older. It is based on the assumption that as people age, their financial liabilities might decrease, and they might not need as much coverage. It's a suitable choice if you have loans or a mortgage that you expect to pay off in the near future.
Convertible Term Insurance Plan
A convertible term insurance plan is a policy that can be changed into another kind of insurance plan at a later time. You might choose this kind of term plan if you anticipate a change in your financial priorities in the upcoming years. For instance, you can choose a term plan that can be changed into a whole life insurance plan.
How Does Term Insurance Work?
- Firstly, you’ll have to examine factors like the net income of your family, the number of dependents, loan EMIs, and all lifestyle expenses. As a general thumb rule, an ideal term insurance cover should be 10-20 times more than your family’s net annual income! Your insurance should be adequate to cover both the present and future demands of your dependents.
- The policy term (or the period for which your term insurance policy remains active) can be from 5 years to 99 years. The sum assured can be from ₹20 lakhs to up to ₹5 crore. [Sum assured is the fixed amount paid to the nominee in the unfortunate event of the policyholder’s death.]
- When you buy a term insurance product, you’ll have to pay a small fee (or premium) every year. The premium for term insurance will be lower the earlier you purchase it. So if you need a cheap life insurance policy, start when you’re young and healthy.
- The insurance company pays out a large sum to the policyholder's family (nominee) in the event of their death.
- In case the policyholder outlives the term plan, nothing is paid out. So look for term insurance policies that allow you to extend your coverage or convert it to a permanent life insurance policy.
Tips to Select Best Term Insurance in India
Assess Life and Financial Situation
Consider your age, financial situation, and the duration of coverage needed to determine the right term insurance policy for you. Assess your financial responsibilities and dependents to choose an appropriate coverage amount.
Evaluate Lifestyle Needs
Understand your spending habits and standard of living to estimate the required life coverage. Ensure that your loved ones can maintain their lifestyle even in your absence.
Assess your income and financial obligations to determine a practical life cover amount. Avoid overburdening your finances by choosing a coverage level that aligns with your income.
Consider Existing Liabilities
Take into account any outstanding debts and liabilities, such as loans, that need to be covered by the policy. Ensure that the policy term and coverage amount are sufficient to protect your dependents from financial burdens.
Customize with Riders
Explore additional riders, such as critical illness, accidental death, or waiver of premium, to enhance your term insurance policy's coverage. Understand the available riders and choose ones that suit your specific needs.
Check Claim Settlement Ratio
Evaluate the insurer's claim settlement ratio, which indicates the percentage of successfully paid claims compared to the total received. Consider insurers with a higher ratio as they demonstrate a better track record of fulfilling claims promptly.
Remember, it's important to carefully research and compare different term insurance policies and providers before making a decision.
How Much Term Insurance Do You Need?
Term insurance coverage differs from person to person depending on factors including income, way of life, costs, debt, and more. You ought to get coverage that is around 10 to 12 times your gross yearly income if you are under the age of 55. Such a sum can be adequate to meet future needs and counter inflation.
You can increase your base coverage with riders for a negligible rise in the premium. These add-ons offer additional payments for unforeseen events like accidental death, critical illness, permanent disability, etc.
What are Tax Benefits of Term Insurance?
- You can deduct up to ₹1.5 lakh from the premium you pay for your term plan under Section 80C of the Income Tax Act of 1961.
- A deduction of up to ₹25,000 is also available under Section 80D on premiums paid for term plans with a critical illness cover option.
- The death benefit received under the term insurance policy is tax-exempt under Section 10(10D).
Term insurance is an important financial tool that can offer peace of mind to you and your loved ones. By choosing the right policy, you can provide your family with the financial support they need during difficult times. You can compare and buy term insurance policies from any popular insurance aggregator platform in India!