When it comes to the financial well-being of one's family, the importance of having a term insurance cover cannot be ignored. This article is aimed at helping individuals find the right term plan and understand how to make the best of it.
What better way to financially secure one’s loved ones than with a term insurance policy? A term plan is a type of life insurance cover where the nominated beneficiary will be paid the death benefit (referred to as sum assured) if the life assured passes away during the policy tenure. When compared with other life insurance products, term plans are the most affordable since they do not have any savings component.
Having a term insurance plan is necessary for anyone with dependent family members or those who have pending debts to pay off. Its high sum assured levels and low premium rates give it an edge over other insurance products in the market. The policy’s payout helps ensure that the beneficiary of the life assured continues to lead the same lifestyle, even when the policyholder is no more. Now, before availing a term insurance cover, it is essential to take several different elements into consideration so as to ensure one is wholly secure. This article explains how it can be achieved in the best-possible manner.
Factors To Consider Before Buying Term Insurance
Since there are a large number of term insurance policies available in the market, it can get daunting for an individual to figure out which would be the best-suited policy for him or her. To help make an informed decision, below are some important points to be considered before availing a term insurance cover:
Adequate Coverage Amount: The coverage amount needs to be the first factor an individual looks into before buying a term policy. Payout from the policy is expected to act as a form of financial aid for the life assured’s family, if and when the unexpected disaster strikes. It is therefore advisable to look for those term policies that come with high sum assured levels, about 10 to 20 times the current annual income.
Policy Period of Longer Duration: The timeframe for which an individual avails a life cover is referred to as tenure or term of the policy. It is recommended that one settles for a term policy that offers a long period of coverage. A wise move would be to buy a policy at an early age and select a long duration, so that the low-cost premium benefit can be availed until the policyholder reaches the retirement age.
Affordable Premiums: The cost for the term life insurance cover is another crucial factor that must be taken into account. Premiums can vary from one term insurance policy to another. However, an applicant must not simply look for the lowest-costing plan as that could translate to lower benefits. An individual has to ensure that the premiums go easy on the pockets, and does not, in any way, compromise the overall financial security.
Additional Covers Available: A rider is an add-on benefit which gets added over and above the base policy, helping expand the insurance coverage. They may or may not be part of the basic insurance cover. Some of the riders that one should consider including in the base policy are Waiver of Premium, Accidental Death, Accidental Disability and Critical Illness.
Important Term Insurance Riders
Apart from providing high coverage at low premiums, the other advantage that term insurance policies offer is in the form of optional term insurance riders. Riders are additional benefits that can be added to the base term plan. It provides a financial cover over and above the basic sum assured. Some of the popular riders that life insurance applicants must consider are:
- Critical Illness Rider
With this rider, an individual can receive a lump-sum amount on diagnosis of a critical illness or condition (only those specified in the policy documents). Major illnesses like paralysis, stroke, heart-attack, coronary artery by-pass surgery, organ transplant and kidney failure, etc. are usually covered under a critical illness rider. The sum assured of this rider shall be payable on the first diagnosis of any one of the covered critical ailments.
- Accidental Total and Permanent Disability Rider
This rider pays a lump sum amount to the policyholder in the event he or she becomes totally and permanently disabled due to an accident. Since, the individual will be unable to continue employment, the payout from this rider can be used to take care of the daily expense.
- Accidental Death Rider
With an accidental death benefit rider, an additional sum assured is paid to the nominee or the beneficiary of the term insurance policy, if the life insured passes away due to an accident. The percentage of the additional amount would be calculated on the original coverage amount. Generally, this figure is equal to the sum assured.
- Waiver of Premium Rider
A waiver of premium rider takes care of term insurance premiums due, if the life assured suffers critical illness or total and permanent disability as a result of an accident by outward, violent or visible means. This rider helps in ensuring that the individual does not have to surrender his or her policy on account of not being to make the premium payments. By continuing the premiums when the life assured is unable to, the waiver of premium rider keeps the policy from lapsing.
Additional Risks Covered Under Term Insurance
Term insurance is an excellent value for money product - they provide the most affordable way to secure a substantial life cover. However, term life insurance policies are not just limited to covering the risk of death, some plans offer certain in-built features or provide the facility of including certain add-ons to expand insurance coverage.
A few of the in-built riders include critical illness cover, accidental death cover, permanent disability cover and waiver of premium benefit (on account of accidental total permanent disability). One of the advantages of opting for plans with in-built riders is that no extra costs need to be borne for them, since the total premium charged is already inclusive of the base and rider premiums. The riders availed separately would require payment of extra premium. An important point to note here is that if a policyholder has availed a term life insurance plan with critical illness cover (in-built or optional add-on), then tax deduction can be claimed on premiums paid under Section 80D of the Income Tax Act, 1961.
It is advisable to include add-ons to the base plan as it gives an umbrella of protection. They provide a significant benefit when a covered incident (like critical illness or accident) takes place. While such incidents may appear very unlikely, they are highly impactful events and hence should be covered.
Term Payout Options: Lumpsum, Monthly or Lumpsum + Monthly
The following are the different payouts options an individual can select from under term insurance:
Lump-sum payout - If the policyholder has chosen a lump sum benefit payout option, the nominee or beneficiary will receive the entire sum assured in one-go when the life assured passes away. This form of payout provides an immediate cash flow at the disposal to the policyholder's family. The money can be used to take care of the important milestones in life such as children’s education or pay off liabilities like car loan, home loan, etc. The payout process under the lump-sum option is simpler than monthly or staggered payments, since the entire sum assured is paid altogether.
Monthly payout - As the name suggests, a monthly payout option is where the insurance company will pay a percentage of the sum assured on a month-on-month basis for a fixed number of years to cater to the periodic fund requirements of the dependents. The monthly payout option is best-suited for those who may not be very savvy with investments and cannot manage the lump sum amount on the demise of the life assured. The advantage of this payment route is that the loved ones of the life assured will be able to meet their recurring monthly financial requirements quite comfortably, since there is regular cash flow.
Lump-sum + Monthly payout - Here, a percentage of the sum assured is paid out right away to the nominee on the demise of the policyholder and the remaining amount is paid in instalments on a monthly basis. The monthly income will be a certain percentage of the remaining sum assured and shall be payable for a fixed number of years. The advantage of such a payout is that the lumpsum amount will help take care of the important life milestones or pay off any major debts, while the monthly payout can be used to meet the family’s day-to-day expenses. This way the dependents do not have to make any comprises when the unexpected occurs.
The most cost-effective way of securing the financial future of one’s family on the demise of the individual is through a pure term insurance plan. Currently, the market is flooded with term insurance products of different companies. To find the best-suited term plan, make sure to compare policies on the basis of the above-listed points and accordingly avail a cover.