Term insurance is the simplest form of insurance product in the market. In this article, we will walk you through its meaning, importance and benefits so that you're thorough with how it functions before you avail one.
Term insurance is a pure protection life insurance plan that covers the risk of untimely death of the life assured during the policy term. The nominated beneficiary will be paid the death benefit (referred to as sum assured) if the life assured passes away during the policy tenure. However, once the policy has reached its maturity, the insurance company is not liable to return the premiums paid, unless the individual has opted for a Term Insurance Return of Premium (TROP) policy.
Term insurance plans can be availed for a defined period of time. The premium amount decided at the time of availing the policy will remain fixed throughout the policy term. With regards to the sum assured, applicants are usually given the choice of selecting different payout options - lump sum, staggered or lumpsum + staggered. Some insurance companies even offer to customise the plan as per the specific needs and requirements of the life assured. The payout from the policy can be used in any manner the beneficiary wishes - to settle loans, pay for school or college fees, etc.
When compared with other life insurance products, term plans are the most affordable since they do not have the savings component. The insurance premiums charged are only for mortality charges and sales & administration expenses. Since there is no savings component to it, the policy does not pay out any maturity benefits, as is the case with endowment policies and ULIPs. This feature makes term life insurance plans the simplest and most-affordable form of life cover available.
Why is necessary to have Term Insurance?
Having a term insurance plan is essential for anyone who has dependent family members or pending debts to pay off. The sum assured levels are high and premiums rates low, which in turn helps to ensure that the beneficiary of the policyholder continues to lead the same lifestyle, even when the policyholder is no more. In other words, the sum assured from a term insurance plan allows the loved ones of the deceased to continue with their day-to-day activities without feeling any financial pinch while running the household.
Ideally, term life insurance should be the first life insurance plan an individual must buy to ensure that his or her family remains financially secure should the individual be no more. Given that it acts as a safety net, having this insurance plan is important. In addition to all this, term insurance also gives policyholders a tax advantage – i) Tax deduction can be claimed on premiums paid under Section 80C of the Income Tax Act, 1961, and ii) Death benefits paid to nominees are tax-free under Section 10(10D).
Benefits of Term Insurance
There are a number of benefits enjoyed by policyholders of term insurance covers. Here is a look at some of them:
Simplicity - Term life insurance plans are comparatively much easier to understand when compared with cash value plans (whole life policies). All that the life assured has to do is pay the premiums and he or she will get the insurance cover for the chosen term. If payments are stopped midway, the policy lapses.
Low premiums - Term insurance is a pure risk plan, which means it only pays the coverage amount if the life assured passes away during the policy period. Since there isn't any investment component to such plans, the premiums charged are low when compared with endowment policies and ULIPs.
Tax benefits - Tax deduction under Section 80C of the Income Tax Act, 1961, can be claimed for premiums paid towards a term insurance cover. The maximum deduction that can be availed under this section is Rs. 1,50,000. Additionally, the death benefit proceeds from the policy are tax-free under Section 10(10D) of the Income Tax Act.
Flexibility - Many modern term life insurance plans are convertible. Individuals can convert their term insurance policies into endowment plans for the same premium amount with associated decrease in sum assured.
In the past, buying a term insurance policy was more of a choice. However, today it has become a necessity. Going without a financial cover is a big risk to take, since the loved ones would bear the brunt of it. Keep the above-listed points in mind while buying a term plan as this will allow one to find the best term plan to cover himself or herself.