2023-07-15
"Life Coverage Insights: Exploring Term Insurance to Secure Futures"
Term Life Insurance
Term Insurance
To begin with in today’s
time we all have understood the importance of having life insurance to save on
money for future benefits. A Term life insurance policy is the simplest, purest
form of life insurance: You pay a premium for a period of time – typically
between 10 and 30 years – and if you die during that time a cash benefit is
paid to your family (or anyone else you name as your beneficiary).
Term life is typically
less expensive than a permanent whole life policy – but unlike permanent life
insurance, term policies have no cash value, no payout after the term expires,
and no value other than a death benefit. To keep things simple, most term
policies are “level premium” – your monthly premium stays the same for the
entire term of the policy. Term life insurance is a type of life insurance
policy that provides coverage for a certain period of time, or a specified
“term” of years. If the insured dies during the time period specified and the
policy is active, or “in force,” then a death benefit will be paid.
How Term Life Insurance Works?
There are various types of
term insurance policies available. Many policies offer level premiums for the
duration of the policy, such as 10, 20, or 30 years. These are often referred
to as “level term” policies. A premium is a specific cost, typically monthly,
that insurance companies charge policyholders to provide the benefits that come
with the insurance policy.
The Insurance Company
calculates premiums based on health, age, and life expectancy. A medical exam
that reviews the insured person’s health and family medical history might be
required, depending on the type of policy chosen.
Premiums are typically
fixed and paid for the length of the term. If the person insured dies prior to
the expiration of the policy, then the insurance company will pay the death
benefit to their beneficiaries. If the term expires and the individual dies
afterward, there would be no coverage or payout. However, the policyholder can
often extend or renew the insurance, but the new monthly premium will be based
on the person’s age at the time of the renewal. As a result, premiums are
higher upon renewal.
Many term policies are
also “convertible,” which means they can be converted into a permanent life
insurance policy, such as universal or whole life, within a certain number of
years after the policy was taken out. If you convert term life insurance to
permanent life insurance, the premium will increase.
Types of Term Insurance
There are various types of
term insurance besides the level term policies we’ve outlined so far. Each
policy has its pros and cons, depending on the needs of the policyholder and
their beneficiaries.
1.
Convertible Term
Convertible term life
insurance allows a term insurance policy, which has a limited number of years
before expiring, to be converted into whole life or universal life insurance.
The major benefits of convertible insurance is that the policyholder gets
lifelong coverage and doesn’t have to submit to a medical exam, nor are any
health conditions considered when the term policy converts to permanent
insurance.
2.
Increasing Term
Some policies allow you to
increase the death benefit as time goes on. The premium increases as well, but
it allows policyholders to pay lower premiums early on. The increasing term
prevents having to qualify for another policy at an older age to get the added
death benefit, as would be the case with traditional term insurance.
3.
Mortgage Term or Decreasing Term
A mortgage term or
decreasing term policy is the opposite of the increasing term because the death
benefit amount decreases over time. The goal is typically to match the decline
of the term benefit to the reduction of the policyholder’s outstanding
mortgage. The idea behind this strategy is that you don’t need as much life
insurance if you have less mortgage debt. However, although the premiums are
smaller than level-benefit term insurance, the premium payments remain constant
even as the benefit declines.
4.
Annual Renewable
As each year passes,
annual renewable term (ART) insurance is renewed but for a higher premium since
the policyholder is a year older. The benefit to annual renewable term
insurance is that the coverage is guaranteed to be approved each year. However,
it may not be the most cost-effective for everyone due to the increased costs
over time.
Do you get your money back at the end of a term life insurance
policy?
If you’re alive when the
term expires, you get nothing back from your term life insurance policy. It is
a death benefit, payable to your heirs only if you die. That is why term life
insurance is relatively inexpensive. However, return of premium (ROP) term life
insurance policies are available. They return some or all of the premiums you
paid. Most people outlive their term life insurance policies.
Features of Term Insurance
Some of the hallmark
features of term plans include the following:
1.
Affordability: Term insurance policies
are some of the most affordable life insurance products. The premiums you have
to pay for term plans are usually much lower than other life insurance policies.
You can get life cover up to ? 1 crore for a monthly premium as low as ? 485/-.
2.
Age of entry: With the minimum
eligibility age of 18 years, you can get term plans early in life. Buying a
term plan at a young age helps you get sizeable coverage at very reasonable
premiums.
3.
Policy Term: Term insurance provides
coverage for a specified number of years, known as the policy term. In case of
an unfortunate event during this period, your nominee will receive the sum
assured in your policy. Term insurance tenures can start from 5 years and
extend up to your 99th birthday if you choose the whole life
insurance option. Depending upon how long your loved ones might need your
financial support, you can select the right policy term for your needs.
4.
Maturity Benefit: Term insurance
provides financial protection to your family in case of an eventuality. It is
not meant to be used as an investment instrument. Thus, it does not offer any
return on the premium you pay in the fortunate event that you survive the
policy tenure. However, the very absence of this investment component makes
term plans so affordable. One of the unique features of term insurance is that
your entire premium goes into securing your insurance cover. No part of it is
deducted for investment purposes. Thus, you can get substantial coverage,
enough to cover the current and future expenses of your loved ones at
pocket-friendly premiums. Also, you can opt for term insurance with a return of
premium feature if you want some maturity benefits. After the policy matures,
you will get back the entire premium you had paid throughout the policy tenure
with such plans.
5.
Flexibility in Premium Payments: You can
pay your term plan premiums as per your convenience. Annual, semi-annual,
quarterly, or monthly premiums are some of the premium payment frequencies you
can choose. Such regular premium payments are ideal for salaried individuals
with a stable income. You can also go for a one-time, lump sum premium payment
if you have some surplus funds lying unused. Alternatively, you can go for a
limited pay option and pay off your premiums within the initial few policy
years. Your life cover^ remains active for the entire term plan tenure. Thus,
if you are self-employed, with variable cash inflows, you can take advantage of
such single pay or limited pay options and keep your loved ones financially
protected against life’s uncertainties.
6.
Life cover: A term plan keeps your
family secure from financial challenges if an unfortunate event occurs. It
provides a life cover of your choice at affordable premiums. With this life
cover, your loved ones get an assured sum in case of an unwanted incident
during the policy period. The payout can help your family avoid compromising
with the lifestyle you want for them in your absence. Additional add-ons: You
can add riders or add-on benefits to your term insurance policy to extend the
scope of your base coverage at a nominal cost.
Various types of riders
are available with term plans, such as:
1. Critical Illness Rider
2. Accidental Death Cover
3. Waiver of Premium Benefit in case of a permanent disability
4. Increasing term insurance: Term plans
allow you the flexibility to update your policy as per the changing financial
needs of your life. You can increase the sum assured or add riders to your plan
at your life’s key milestone events. Thus, after marriage, or when you welcome
your children into your family, and your financial liabilities increase, you
can enhance your coverage. It enables you to provide your loved ones with the
right financial back up against unforeseen situations.
5. Tax benefits: Term plans offer many tax6
benefits. Under Section 80C of the Income Tax Act, 1961, you can claim deductions
up to ? 1.5 lakh on the premium you pay for your term plan. The payouts are
also tax6-exempt under Section 10(10D). Moreover, with an add-on health-related
rider, you can avail of tax6 benefits under Section 80D on the premium paid for
the rider.
6. Premium waiver: This benefit waives off
all your future premiums in the case of a disability9 caused by an accident.
Hence, even if you fail to pay the premiums due to any income loss from a
disability, you will still be able to keep your family’s future secure.
What is the Ideal Duration of a Term Plan?
Most life insurance
companies offer coverage for up to 75-85 years of age, while some may offer
coverage till the age of 99. It varies from insurer to insurer. Evaluating the
correct duration of a term insurance plan is critical. You need to plan about
the finances if something happens to you.
Let us understand what
happens when you buy a term plan at different ages:
1.
If you are in your 20’s
Buying a term insurance depends on your current age and retirement
plans. Let’s say you are in your 20’s and are likely to retire by the age of
60. You must go for a 35-40-year term plan. It will get you covered until your
desired retirement age. It is good to think and plan for your future. If you
buy a term plan at this age, the premium will be low. It will be affordable for
you. Hence, it is always said to buy a term insurance plan as soon as you start
working.
2.
In your 30’s and 40’s
When you enter your 30’s or 40’s, you will likely get married and
start your family. Now that you have people who are dependent on you, you
should start thinking about buying term insurance plans. At this age, you
should opt for a duration of 35-40-year term insurance, depending on your
financial s and retirement plans or employment type.
3.
In your 50’s and 60’s
When you are older, around 50-60 years of age, by this time, your
children will likely be settled, and the burden on you to work and pay bills
will be low. At this age, you can opt for a term plan for a 15-year term.
In conclusion, term life
insurance offers a cost-effective solution for providing financial protection
for a specific period of time. It provides a death benefit to the
policyholder's beneficiaries if the insured passes away during the term of the
policy. Term life insurance is a popular choice for individuals who want
coverage during their working years or to protect their family's financial
well-being. It allows policyholders to customize the coverage amount and term
length based on their specific needs. However, it's important to note that term
life insurance does not build cash value and expires at the end of the term,
requiring policyholders to renew or convert the policy if they want to continue
coverage.
- IFA Team