All you wanted to know about Term Insurance

Term Insurance

Introduction

Term Insurance is one of the most searched terms on Google. This is pure insurance. Although this is the policy that each and every individual should have but agents/ advisors seldom inform individuals willing to go for insurance about this. The reason stated is that the commission, agents/ advisors get for this type of policy is comparably less as compared to commissions from other policies. People use various terms, such as, Term life, Term Insurance, Term Life Insurance, Pure Life Insurance, Pure insurance, etc to search for information related to Term Insurance. Some of the most sought after queries relating to Term Insurance (on google) are listed below:

  • Best Term Insurance Policy in INdia?
  • What is term life insurance?
  • Advantages and disadvantages of life insurance?
  • Term Plan Vs Whole Life Insurance?
  • Premium of Term Plan?
  • Should I get 20 year or 30 year term insurance?
  • Are term insurance and life insurance same?
  • What are different types of term insurance policies?
  • Benefits of term insurance plans?

This article is going to give insight about Term Insurance plan, features of this plan, finding adequate term insurance plan coverage amount, and correct duration of term insurance plan. The article will also cover different types of term plans and also compare term plan with whole life plan.

What is Term Life Insurance?

Term life insurance, also known as pure life insurance, is a type of life insurance that guarantees payment of a stated amount (as mentioned in the policy document) if the insured person dies during a specified term (policy term) and all the premiums of the policy have been duly paid. After expiry of the term, the policyholder can either renew it for another term (if this option is available), convert the policy to whole life coverage (if this rider is available and has been choosen by the policyholder), or allow the term life insurance policy to terminate.

Types of Term Life Insurance: Level, Decreasing and Increasing options

Term life insurance plans are flexible and economical options for life insurance coverage. While all term life insurance plans ensure payment of sum assured in the event of death (during the course of the plan), there are some variants in the market which can have an effect on the amount of premium being paid and settlement amount being received. Three types of Term life insurance plans are discussed below:

Level Term Life Insurance: This is most common type of Term life insurance which provides a level death benefit over the entire duration of the plan (policy). In this annual premium remains same and the death benefit remains constant for the entire duration of the plan (policy).

Decreasing Term Life Insurance: With decreasing Term life insurance plan the death benefit decreases annually or at specified durations during the lifetime of the policy. Annual premium may remain same and/ or may decrease. This basically depends on the options made available by the insurer and the option availed by the policyholder. These (decreasing term life insurance) are generally used as Mortgage Protection Insurance. Generally, people who have taken home loans or car loans are required to take this type of insurance.

Increasing Term Life Insurance: Under these, the overall death benefit increases over time. This is normally at a previously determined fixed percentage over a period of time. This type of insurance ensures that coverage increases over a period of time (as prices rise and salaries rise). Premium too increases when coverage increases. These policies are more expensive as compared to ‘Level Term Life Insurance’ and ‘Decreasing Term Life Insurance’.

Key features of Term Life Insurance?

  • Should the insured person die, the insured amount (as mentioned in policy document) is paid
  • There is no maturity value (should the insured person survive the entire duration of policy)
  • Since there is no saving element hence the premium is very economical
  • The premium calculation is based on person’s age, health, occupation, place of residence, existence of diseases, etc
  • Premiums paid for a term life insurance policy receive tax exemption under Section 80C of Income Tax Act, 1961
  • Various riders, such as, accidental death benefit rider, accelerated death benefit rider, accidental disability benefit rider, critical illness benefit rider, waiver of premium rider, etc are available with the policy. Availability of rider(s) may vary from insurer to insurer

Duration of Term Life Insurance policy?

There is no correct or wrong answer. It depends on the perception, need and age of the individual taking the policy. Ideally, the policy should cover an individual upto at least 60 years of age. It is worth mentioning here that sooner the policy is purchased, lesser the premium.

Typically, premium for a 30 year old person would be in the range of INR 10000 to 12000.

How much coverage should be taken?

Ideally, the coverage should be equivalent to ten to fifteen times the yearly salary of the insured person. This much amount would be sufficient to meet long term needs of the family.

Term Life Insurance vs Whole life insurance

Both of these are life insurance products. The main differences in these policies are with respect to duration of the policy, saving component and the cost. Individual’s needs would decide as to which policy suits him/ her.

Indicators/ CriteriaTerm Life InsuranceWhole Life Insurance
Cost of PremiumVery low premium as compared to other policies. Maximum coverage at minimum cost.Premium is quiet high as compared to premium of term life insurance plan
CoverageHigh coverage at low premiumLow coverage as compared to term plan
DurationCoverage is for specific period, such as 10 years, 20 years, 25 years, etcThis type of insurance offers coverage for entire life (provided premiums are paid timely)
Saving componentThis is pure risk policy. Beneficiary receives payment only when the insured person (policy holder) dies. There is no payment on maturity or when the policy expires. Now, some insurers are offering term life insurance policies in which the entire premium collected is returned, if the policy expires and policy holder is aliveThese type of policies offer option to save money. The policy holder can borrow or withdraw against the saving portion of his/ her policy.

It is worth mentioning here that some insurers offer rider with term life insurance to later convert it into whole life insurance policy.

Conclusion

High sum assured along with low premiums, availability of tax benefits on premium paid, make term life insurance a necessity for all individuals. We all know our birth date but none of us knows our death date. We do not know when it will happen and how it will happen.

None of us want to die early and we do not even want to talk about it. But the fact is, life is uncertain beyond expectations. Accidents, natural calamities, terrorist attacks, riots, diseases, pandemic (like COVID19, etc) can cause death to any individual. So it is in the interest of the individual who has dependents to take term life insurance plan.  

The emotional and physical void created by death cannot be filled by anyone but this policy will ensure that long term needs of the insured person’s family are met.

beinghappyalways

My name is Vivek Kumar Govila and I am PGDBM by qualification and Financial Advisor by choice. I have a total work experience of 22 years in the corporate sector with some of the biggest and well-known Consultancies. My passion for having something of my own prompted me to enter into this field. I am here to help families plan their future financial needs through financial planning. I can help in planning for protection, retirement planning, children's marriage, children's education and wealth creation.
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9 months ago

Hi. I read a few of your other posts and i wanted to say thank you for the informative posts. Neile Jodi Kimberly