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Term Insurance 447 views January 29, 2019
To ensure a financial cover that will continue to protect our family in our absence necessitates buying term insurance. We choose the amount of life cover or sum assured based on what we believe our life is worth. In addition, the nature and extent of responsibilities, existing liquid assets, types of liabilities and necessary daily expenses of the family must be taken into account while opting for a term insurance plan. Whether our earnings today is adequate enough to cover the expenses of tomorrow is a question that highlights the ubiquitous effect of inflation on prices of necessary goods and services.
Life is uncertain, and change is constant. Death knocks at the door unannounced, thus, leaving the family prone to grief and economic instability. Though one cannot put a monetary value to life, the amount of sum assured payable by the insurance company to the nominee(s) of the insured makes up for the loss of income for a certain period of time. However, with inflation being one of the deciding factors of price, one cannot be sure how much amount of life cover must be deemed enough. Buying an incremental term insurance plan ensures that the nominee(s) receive a higher amount of cover in tune with inflation.
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Most people are not aware that the amount of life cover, chosen while buying term insurance, can be increased every year. An incremental term insurance policy, also called increasing term plan, does that precisely by allowing scope for increase in the sum assured each year by a specified amount. The increase in life cover also entails a rising rate of premium every year. However, the extent to which rise in sum assured would be allowed depends on the health of the policyholder while buying the policy.
There are certain aspects of incremental term insurance that you must be aware of. Some of them include:-
The amount of life cover or sum assured increases by a fixed rate every year. However, it depends on the insurance company if they prefer to calculate the rate by a percentage or an absolute amount. In both instances, the rate of increase is mentioned while buying the policy and continues to be unaltered throughout the policy period. However, if the rate of increase is expressed as a percentage, the insurer may choose between increasing the sum assured at a simple or compound rate of interest, though the simple rate of interest continues to be the preferred norm. Some of the increasing term insurance plans limit the maximum amount of increment to the sum assured after a period of time, though the policy period may continue.
Premium charges corresponding to the increasing sum assured remain fairly constant throughout the policy period. However, to compensate for the rise in sum assured over the period, the premiums charged during the first few years are more than that charged during the latter half of the policy term. It is important to note that the premiums corresponding to incremental term insurance are always more than those paid on level term insurance plans.
Like most level term plans, incremental term insurance policies pay only death benefits to the nominee(s) of the insured. The amount of death benefits payable to the dependents is the sum assured calculated after the increase during the policy year in which the insured died. Most insurance companies prefer to pay a lump sum as death benefits while there are others that avail the nominees of its policyholders the benefits of monthly or yearly income payout. This means that the nominee(s) can choose to avail the death benefits or sum assured as a lump sum payment or a monthly/yearly income for a pre-specified period post the demise of the insured.
Incremental term insurance plans come with rider benefits too. This means that the policyholder(s) can increase the scope of coverage by choosing to opt for additional riders and paying for them. One does not need to pay a hefty amount for them. Riders come at minimal additional premiums. Some of the common types of riders available with increasing term insurance policies include:-
Availing this rider at added premium allows the benefit of an additional amount of sum assured to the nominee in case of accidental death or disability of the insured during the policy period;
If the insured suffers from any disorder listed under critical illnesses and covered by the rider during the policy period, then he or she gets an additional amount of sum assured as rider benefits;
In case of sudden disability due to an accident, the insurance company waives off future premiums while the policy continues.
Tax benefits are similar to that of level term plans. This means that the premiums paid towards the policy are eligible for tax deduction under Section 80C of the Income Tax Act. Furthermore, the death benefits, irrespective of the amount, are exempt from tax liability under Section 10(10)D of the Income Tax Act.
The inflation rate each year far outgrows the rate at which your income grows annually. With time, you are burdened with added responsibilities like expenses on children, home loan, asset creation, etc. As the amount of sum assured in increasing term insurance rises each year by a fixed rate, your nominee(s) are assured of an amount that can take care of their daily expenses and acts as an effective tool against rising inflation rates.
Moreover, having an incremental term insurance plan in place is equivalent to creating a secure financial future at affordable premium rates. The tax benefits while paying premiums and on receiving death benefits ensure that every rupee you plan towards the security of your dependents gets spent on them.
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