Term insurance can provide your loved ones with the much-needed financial security for life’s uncertainties. This article highlights some of the important factors you need to consider for finding the perfect term insurance plan.
It’s true when they say “To err is human”. But if you are not careful, a financial slip-up can have serious consequences. In this day and age, when the cost of living only seems to be moving up, not having financial security in place to protect your loved ones can prove to be a big mistake. A popular instrument recommended by experts to serve the purpose of protection is term insurance. It is a life insurance product that provides coverage at a fixed rate of payment for a specific period of time. Term plans provides high sum assured at very affordable rates - so there really isn’t a strong reason for neglecting to get this.
Now, when you look at the insurance industry, you will find that you’re spoilt for choice. The number of term policies in the market are plenty, varying from each other on the basis of features, benefits and costs. So, how do you go about finding the plan that’s right for you?
Here are 4 factors to keep in mind before buying a term insurance plan:
Sum AssuredThis is the amount your loved ones will receive in the event you pass away during the policy period. To know how much coverage you'll be needing, you must assess and consider elements like your age, financial responsibilities, basic expenses on the basis of your lifestyle habits, family’s future financial requirements, loans you are repaying today and inflation. Ideally, the younger you are, the higher your sum assured should be. If you're repaying any debt, the pay-out should be such that it takes care of the pending payments, and at the same time, meets your family's financial needs. It is generally advisable that one opts for a coverage amount that is 10 to 15 times the current income.
Policy TenureThe primary objective of getting term insurance is to replace the income of the life assured in case of his or her demise. It is therefore important that you are covered for the whole period that you intend to keep working, say till 55 years or 65 years of age. You can even opt for longer policy periods as there are plans available in the market that provide insurance cover up to 100 years of age. Buying term insurance at a young age for the long term is always a wise idea since you can benefit from low premiums. If you decide to get a plan in your 50s or 60s, you’ll be shelling out quite a bit in premiums.
Claim Settlement Ratio of Insurance CompanyClaim settlement ratio is the overall number of claims approved by an insurer divided by the overall number of claims it has received. Since the ratio is an indication of the claims that a company has settled, it forms an important point of consideration while deciding which insurer to avail a policy from. Every year, the IRDAI releases a report listing the claim settlement ratio of the insurance companies in India. It is always wise to opt for insurance provider who holds a high percentage figure as the likelihood of claim being settled by that insurer is greater.
Insurance RidersThese are add-ons that can be attached to the base term plan for the purpose of enhancing protection. Waiver of premium, critical illness benefit, accidental death benefit, disability income and accelerated death benefits are few examples of riders that can be included with a term insurance plan. You will be charged an additional premium when you attach add-ons to the base plan. That is why it’s important that you evaluate your risks and accordingly take a decision whether you want to avail the benefit of riders.
Plus And Minus Point Of Term Life Insurance And When You Should Buy It
What are the Benefits of Term Insurance?
SimplicitySince term plans are pure risk covers, they are much simpler to understand than cash value policies like endowment and whole life insurance. Under a term insurance plan, the life assured has to pay a fixed premium for the policy period. In the event the individual passes away (during the term of the plan), the company will pay the sum assured to the beneficiary. If the individual outlives the policy period, no benefits are payable.
Low premiumsThe premium for term plan is much lower when compared with cash value policies. E.g. A 30-year old looking to buy a level term policy of 20 years for Rs. 10 lakh coverage amount will have to pay around Rs. 3,000 in annual premiums. Premiums for an endowment policy without profits, with the exact sum assured, will come to a little over Rs. 30,000 annually. The yearly premium for an endowment policy with profits will come to about Rs. 50,000.
Tax advantagePremiums paid toward a term insurance policy are eligible for tax deduction under Section 80C of the Income Tax Act, 1961. The maximum deduction you can claim under this section is Rs. 1,50,000 in a financial year. Additionally, the death benefits received by the beneficiary are completely tax-free under Section 10(10D) of the Income Tax Act.
Limitations of Term Insurance
- Since age plays a role in determining the premiums rates, it will be high for those looking to avail a term cover at 50 or 60 years of age.
- No maturity benefit or surrender value is payable under term insurance.
- Loan cannot be availed against term insurance. When comparing the plus and minus points, it is quite evident that the benefits far outweigh the limitations. Now, here’s a quick look at the most appropriate life situations to avail a term insurance policy.
- If you face any financial constraints, then a term insurance can be a good option as whole life and endowment policies cost much more.
- If you are the sole breadwinner of the family, the sum assured will replace your income in the event you are no more.
- If you have just started a business and do not want to invest in cash value policies because of the high premiums, you can go for a term plan and invest the difference in the business.
- If you have taken a home loan, car loan, etc., your family can use the sum assured to repay the pending amount in case you pass away during the policy period.
Now that you know everything there is to term insurance, don’t delay your decision to purchase this plan for a later date as you put the future of your loved ones at risk. The insurance options in the market are plenty. Carefully evaluate the plans on the basis of the points mentioned above and accordingly decide which one you would like to go ahead with.