What is a Term Insurance Plan? Why is Term Plan Important?
What is a Term Insurance Plan? An Overview
In this era of investment, we look for opportunities to accumulate wealth as well as earn the maximum potential returns by parking our money. We are often advised to start investing from an early age to have a sustainable income by the time we retire.
While taking risks and investing in the stock market or mutual funds is the common advice that we usually receive at that age. This blog, however, explores one of the most underrated pieces of advice for people in their 20’s i.e. starting on with an insurance premium. Buying insurance for your health or life per se ensures to relieve you from a huge financial burden in case of unforeseen circumstances. Early-age insurance also curtails the high cost of investment as you can start with a minimum premium at that age. Insurance comes in different forms but one of the most important is the one that insures your life. One such life insurance policy is called term insurance.
Term insurance is one of the simplest forms of life insurance policies and is commonly preferred. So, let us dive deeper into understanding what term insurance plans are, what they provide you with as well as the crucial factors while choosing an appropriate term insurance policy.
What is a Term Life Insurance Plan?
As the name suggests, a term insurance plan or policy is a category of life insurance plan that provides you with a life cover for a particular or pre-determined term. It helps you to aid financial protection for you as well as your family at affordable rates if started on at an early age. This ‘fixed period’ of this term life insurance is known as the policy term. The term insurance generally covers a fixed amount in case of the unfortunate demise of the policyholder while the term of the policy is active.
This amount that you may require in case of your demise to protect your family from financial suffering can be easily calculated on an online term insurance premium calculator. It is advisable and convenient to obtain the premium amount for your term insurance, beforehand, to identify the sum insured by the policy and customize it as per your requirements and conditions.
A term life insurance plan is worth it for many reasons, specifically to stay at your feet during times of uncertainty and not let your family experience the added misery in an unfortunate circumstance, particularly when you are the sole bread earner in your family. Let us find the factors that contribute to availing of term insurance.
Why is Term Insurance Important?
- Financial Security: The foremost and most evident reason to start your term insurance premium is establishing a sense of financial freedom for you and your loved ones, in case of any uncalled mishap. If you are a primary earner in your family, it is of utmost importance to ensure a monthly financial plan through term insurance in case of your absence.
- Affordable and Sustainable: The attractive feature of term insurance is that it is the most affordable out of the other life insurance policies that are available. You can start with your premium at the earliest at the age of 18 with as low as Rs 400-500 to get a life cover up to Rs 1 crore.
- Flexible: Most term insurance provides you with the flexibility to change the term of your cover as per your changing financial position as well. The term insurance policies allow you to increase the sum that has been assured or even add riders such as critical illness cover, accidental death cover, etc. to your plan at your major life milestones.
- Tax-Benefits: The other added benefit to term insurance is that it offers many term plan benefits. As per section 80C of the Income Tax Act 1961, an insurer can claim a deduction of up to 1.5 lakhs on his total income. Also, you don't have to worry about the payouts or premium being taxed because as per Section 10(10D) and Section 80D respectively, you can claim exemption on the same.
- Maturity Benefits: The insurance cover is secured by your premium and entails a sense of financial freedom. You can avail yourself of a term insurance policy that shall pay the entire premium amount back to you on maturity. This helps you to curtail any other investment shenanigan you might be facing at that time. Also, secure you and your family with an extensive life cover for times of trouble.
Important Factors For A Term Insurance Plan
- The Insurance Cover: Before choosing a term insurance plan, an insurer must understand the terms and conditions of the cover. You must calculate the premium amount and obtain a viable plan based on your age, lifestyle, debts, financial sources, and lifestyle requirements. This shall help you to plan for your desired cover in advance and avoid any hindrances at times of important calls.
- Medical Cover: One factor that goes neglected while seeking an insurance plan is looking for the advantage of a medical or a critical illness cover. Today, most term insurance plans provide critical illness protection plans. These covers protect you and your family in times of uncertain events as well as during your lifetime. Benefits such as critical illness benefits seek your financial security, specifically against unfortunate and various life-threatening conditions that may leave a long-term impact on your health such as cancer & heart attack.
- Claim Settlement Ratio: A claim settlement ratio is an important indicator. If you're looking for a term insurance plan. The ratio defines the total claims that are settled in a year. This gives you a fair idea of how reliable the term plan of the insurance company is. Take note that the higher the ratio is the higher the reliability.
- Additional Benefits: Seeking a term insurance plan, which covers a fair share of your targeted financial plan is important. However, at the same time, there are many other riders to term insurance that one needs to consider. For instance, if your plan provides you with accidental cover or maturity benefit. Apart from that, term insurance with a premium waiver or income benefit along with an extensive cover shall be a preferable choice for a perfect term insurance policy.
- Solvency Ratio: This is another financial ratio that one must consider while deciding to sign up for a term insurance plan. A solvency ratio helps you to identify the capability and the strength of an insurance company to settle claims. This gives you a clearer picture, at the same time saves you from being trapped in the loss of your premium amount. An ideal solvency ratio is 1.5 and above to obtain an ideal term insurance cover.
What is a Term Insurance Premium Calculator?
You can use a term insurance premium calculator to calculate the premium to be paid. An organization can understand the importance of premium amount when choosing a policy and therefore, most organizations feature a premium calculator on their website to help in determining the premium amount before selecting a policy.
You have to enter information into the premium calculation including date of birth, gender, smoker or not and the needed coverage amount. The premium calculator will share the premium amount and the supplementary benefits that come with the policy.
Renewal process of term insurance
It is necessary to renew your insurance on time before it expires.
Term insurance can easily be renewed by following these simple steps
- Foremost, it is necessary to review your present policy. One may not wish to continue with the process in the long run therefore, it is important to review and make changes as necessary.
- Visit your insurance provider's insurance website and click on the renewal tab. Provide the necessary details and click on the confirm button.
- Lastly, make the payment. There are a plethora of options when it comes to choosing payment options. You can select any at your convenience.
What should I know about the claim process?
In case the policyholder passes away, the dependents are required to file a claim to obtain the amount the insurer ensured at such an event.
Following are the steps for claiming a term insurance policy
- Informing insurer about the claim: initiation of claiming the term insurance policy begins by contacting your insurer through available mediums and intimating them about the situation.
- Submit the documents: Documents including original life insurance policy documents, proof for the claim, the death certificate of the policyholder and medical records are required to be submitted. Additional documents can be required as well.
- Claim settlement and payout: once the required documents have been submitted, verification of the documents begins. The final settlement decision is made. If everything is in order, the policy will be honored but if there is a contradiction, the policy can be rejected as well.
Term Plan VS Endowment Policy VS ULIP
It is quite often observed that insurance products like term insurance, endowment policy and ULIP become hard to differentiate among customers.
To enunciate the differences among them, here are the differences
|Term Plan||Endowment Policy||ULIP|
|Premium for 1 crore||INR 9000 (approx)||INR 60,000 (approx)||NA|
|Maximum sum assured||No limit||No limit||Depends on fund value|
|Premium Payment||Single Pay/ Monthly/ quarterly/ Half-yearly/ Yearly and limited pay options||Single Pay/ Monthly/ quarterly/ Half-yearly/ Yearly and limited pay options||Single Pay/ Monthly/ quarterly/ Half-yearly/ Yearly and limited pay options|
|Maturity benefits||None unless its TROP||Offers benefits||Benefits linked to market investments|
Term Life Insurance VS Whole Life Insurance
When we talk about insurances, we often hear about term life insurance and whole life insurance. Term insurance specifies a specific life insurance type whereas life policies are defined as full life insurance policies.
To help you to understand better, skim through the following table to understand the differences
|Whole Life Policies||Term Insurance Policies|
|Premium||Higher as compared to term insurance policies||Significantly lowered as compared to whole life policies|
|Coverage period||Provide cover for the entire life||Provide cover for only a specified period of time. For example, 30 years|
|Investment Options||Within the policy for savings’ enhancements||Do not offer investment elements|
|Benefits provided||Survival benefit, maturity benefit and death benefit provided||Only provide death benefit|
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Certainly, a term life cover is a ‘lifesaver’. Unlike most insurance plans, it also gives you the flexibility of choosing the frequency of your term plan premium i,e, annually, semi-annually, quarterly or monthly. If you prefer a one-time payment instead of a frequent premium payment, you can also choose to avail yourself of a term insurance plan through a lump-sum amount. However, you must analyze your steady requirements to provide for yourself and your family and choose the best term insurance per the same.
What is HLV?
HLV or Human Life Value is the numeric method that helps you to identify and analyze the amount of life cover that you may require. It is easy to calculate and generally starts with the age group of 18-35 requires 25 times your total income. This means your life cover if you are in that age group should be 25 times your current total income.
Can I buy term insurance for my spouse?
There are many term insurance policies that provide for a joint cover for both you and your spouse. These are quite popular and highly preferred for their cost-effectiveness.
What is a term illness benefit?
A term illness benefit on your insurance cover secures you for an unforeseen disease that is unfortunately incurable. These are generally added to your cover in case you're diagnosed with a term illness or are at the end-stage of the disease and have about less than 12 month to live. Such additional benefits come as a rescue to the family of the policy holder as he is provided with a lump sum amount on his policy.
Can I convert my term insurance into permanent life insurance?
If you have availed yourself of a convertible term life insurance, then as per the terms you may be able to convert your time-bound term policy into a permanent life cover on its expiry. You may also not be required to submit any added medical documents or health check-ups for the same.
How much life cover do I need?
According to best practices, the sum assured should be a minimum of ten times higher than annual income. A higher range is always considered a better choice, however, individual preferences and needs should always be considered into account.