Why Term Plans are Considered the Core of the Life Insurance Industry?

Life insurance is a contract between insurance providing company and the insured, where the insurer promises to pay a death benefit to the nominee in the event of the death of the insured. The insurance company under a contract to pay the consideration and to provide financial protection to the surviving nominee after the demise of the insured.

Since the inception of life insurance, the basic ideology was to provide financial security to the surviving dependents. Life insurance was introduced on the concept that in the event of loss of life the sum insured is paid to the nominee as the dependents are exposed to the financial uncertainties.

How do life insurance works?

To understand the importance of term plans to the life insurance industry it is important for us to understand how the life insurance industry work. The ideology of life insurance is based on the following foundation.

1. The first step involves understanding human life value
2. Next, understanding the risk associated with the loss of life
3. Once the risk is identified, the insurer pools the money from the insured by way of premium in order to compensate the dependents in the event of the death of the insured.

Thus, the above is the basis of life insurance. Life Insurance as the name suggests was predominantly started to cover for the financial losses that might incur in the event of the death of insured. If in the event of the death of insured who is the bread-earner of the family then the loss is immense as the entire financial backbone of the family is shattered. Currently, there are many life insurance products in the insurance market like the endowment plan, unit-linked plans, money-back plans, pension plans, etc. However, unlike term insurance which is a pure insurance plan all these plans are not pure insurance plans as they offer insurance plus investment opportunity to the insured. Thus, we will now understand what term insurance plan offers.

Term Plan – the most preferred life insurance plan

Term insurance plan is the simplest, purest, and most affordable form of life insurance plan. The term insurance plan promises to pay the benefit only in the event of the death of the insured. This benefit called the death benefit is paid to the beneficiary nominated by the insured at the time of purchase of the policy. Under term plan, there is often no maturity benefit i.e. the insured does not receive any benefit in the case he/she outlives the policy tenure, therefore, term plans are called as pure protection plans.

Importance of term plan for the life insurance industry

Life insurance was introduced to mitigate the risk associated with the death of an individual. A term insurance plan is designed on this ideology. A term insurance plan is a pure protection plan similar to the ideology of life insurance. While, e the endowment plans including variety like the money-back plans, pension plan, child plan, etc are designed to offer insurance cover along with investment opportunity. No doubt endowment plans are a step ahead insurance products however the basic and maximum life protection coverage is offered under term insurance. The reasons for the term plans being the backbone of the life insurance industry is its popularity, the following are the main reasons for the popularity of term insurance plans:

1. Lower premium rates: A term plan offers comprehensive life cover at low premium amount. Insurance seekers want higher insurance coverage without having to pay a higher premium amount. As term insurance is available for lower premium so there is higher number of buyers for it.
2. Sum Assured: Term insurance is not just about the lower premium amount as it allows you to choose the higher sum assured thereby securing the financial future of your family. However, under the endowment plan, to avail higher sum assured you have to pay a higher premium amount which is not the case under term insurance plans.
3. Additional Benefits: Life coverage under term plan is more as compared to endowment plans. On the other hand, maturity benefit or sum assured received by the insured under the endowment plan to some extent depends on the market performance, especially if the plan is a participating endowment plan.

Final Word

Term plan runs on the basic premise of life insurance i.e. to cover the risk associated with the loss of life. Additionally, insurance seekers are more attracted to term insurance due to higher coverage, less premium amount, rider facility, and additional benefits it offers. Thus, all these reasons contribute to the popularity of term insurance plans and this makes term plans as the core of the life insurance industry.