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Term Insurance 4320 views July 23, 2019
Term insurance plans are the most preferred kinds of life insurance policies. While the benefits of buying a term plan are numerous, not all types of term insurance products are the same. The flexibility of term insurance regarding the extent of its coverage makes it one of the most sought after financial instruments by those looking to extend a protective financial cover for their loved ones.
Table of Contents
Based on the kind of coverage and advantages, term insurance plans may be classified as under:-
This is the simplest kind of term plan insurance in which the predetermined amount of sum assured remains unchanged throughout the entire policy tenure. As per the proposal contract, the death benefits are handed over to the nominee in case the insured dies within the policy period. The policyholder may choose policy terms for up to 10, 15, 20 or 30 years.
These plans are unlike the term plans that promise death benefits only on the death of the insured. These plans promise maturity benefits in case the policyholder survives the policy period. The premiums paid by the policyholders are returned to them when the policy ends, thus explaining the plan’s name.
This can be explained with the help of an example. Consider a policyholder who has bought a TROP plan worth Rs. 500,00,00 for 20 years, the yearly premium of which is Rs. 5000 only. If the policyholder survives the term, the insurer is liable to pay back the premiums paid over the entire term of the policy. This means that the insured will receive an amount of Rs. 100,000 (5,000 x20) from the insurance company.
Whether you are planning to buy an online term plan or an offline term policy, deciding an adequate amount of sum assured to relieve your family of the financial burden in your absence is important. Many people take into account the probable income deficit after their deaths in addition to the quantum of liabilities taken to arrive at the amount of sum assured. However, many people forego the impact of inflation that can have an augmenting effect on their expenses in the long run, thus mandating an increased amount of coverage in the long run.
An increasing term plan serves the purpose as the amount of sum assured continues to increase by a specified amount since the commencement of the plan. However, many insurance companies agree to issue this plan only after verifying the health conditions of the prospective policyholder. The amount of premium may or may not remain the same throughout the policy tenure. Just like level term plans, increasing term insurance policies pay death benefits only on the demise of the insured. The insurance company would pay out the amount of sum assured that would be applicable post an increase at the start of that policy year in which the insured had died.
Many people invest enough to ensure that their loved ones do not have to struggle for financial cover in the event of their deaths. Thus, insurance requirements only keep decreasing over time. Policyholders who buy term insurance only to ensure that their dependents do not feel financially strained while paying off the loans taken initially prefer to pay for decreasing term plan insurance. The sum assured in these plans keeps decreasing as the policyholder pays off the EMIs of the loan taken. This type of term plan is essentially a mortgage protection insurance as this is bought only to offset the burden of the loans taken. However, premium charges of decreasing term plans remain unchanged just like level term insurance and ensure that the policyholders do not pass off their debt to their dependents.
The idea behind these plans is clear as the name suggests. Policyholders paying for these plans have the option to convert these plans into any other kind of insurance product. Many customers who have bought term plans for a specified period prefer to change them into permanent life insurance products or endowment assurance plans of equivalent value sans the need to undergo any medical examination or underwriting measures. As opposed to term plans that allow death benefits only, conversion into an endowment plan ensures maturity benefits for customers too in addition to the earlier promised death benefits. For example, any customer who has a convertible term plan worth INR 100,00,000 can get it converted into a whole life policy of the same value without going through any kind of medical examination.
Convertible term plans also allow scope for inclusion of optional riders by paying additional premiums. Some common riders that customers may opt to buy include Accidental Death and Disability Benefit Rider, Critical or Terminal Illness Rider, Waiver of Premium Rider, etc.
However, it is important to understand that the conversion option is triggered only after the policyholder makes a formal request to the insurance company. If the policyholder fails to move an application in favor of conversion, the term plan continues to operate without any change and expires either on the death of the policyholder or exceeding the maturity date mentioned in the plan. This optional benefit of conversion is available either as an inbuilt coverage feature or an add-on option depending on the insurer you have chosen.
The benefits of any kind of term insurance plan are subject to payment of premiums regularly and timely. Irrespective of whether policyholders choose the conversion option or not, the premium charges remain unchanged. The amount of premiums to be charged throughout the entire policy period is predetermined based on the age, the amount of sum assured, policy period and premium paying term. The premium amount remains the same throughout.
Tax benefits under these plans are similar to that available on pure term plans. The premiums paid towards these plans are deductible under Section 80C of the Income Tax Act 1961 while the benefits available, be it death benefits or maturity benefits, are exempt from tax evaluation under Section 10(10D) of the Income Tax Act.
Additional benefits are always welcome, especially, when it comes to term insurance plans. Riders are essential additions made to term plans to enhance their performance or ensure greater coverage to the policyholder. Opting for riders implies that policyholders in addition to availing death benefits will get a host of additional benefits, not otherwise available in vanilla term insurance. While some riders are included as a part of the basic term plan insurance, there are others that mandate additional premium payment for inclusion in the policy benefits. Some of the riders include:-
Accidental deaths are common in India. Unfortunate and unforeseen deaths due to accidents can result in dependents reeling under immense financial crisis. To counter the adverse effects of sudden deaths due to the accidents, some insurance companies advise their customers to opt for accidental death benefit rider that guarantees an added payout over and above the basic sum assured. The added amount of death benefit is a percentage of the original amount of sum assured and varies among insurance companies. Insurers charge extra premiums from customers availing this rider option. However, the premium charges remain fixed during the entire policy period. Policyholders working under hazardous conditions or prone to accidents owing to their frequency of travels or the region where they live should opt for this rider.
Some illnesses are terminal in nature. The amount spent on hospitalization and medical treatment of such people can extend to lakhs of rupees, thus causing acute financial distress to family members. Nominee(s) of the policyholders who had opted for this rider are handed over a part of the sum assured in advance to ensure timely treatment. Policyholders should consider having this rider while buying the policy. The percentage of sum assured that would be paid in advance is decided at the time of signing the policy proposal. Available at very nominal costs, this rider is beneficial during times of medical emergencies, thereby ensuring enough money for proper treatment.
Accidents, especially those on the road, are pervasive. This explains the increasing popularity of this rider as more people are now opting for it. The rider comes into force if the policyholder becomes temporarily or permanently disabled due to the accident.
Changing landscapes, climatic variations, a rise in pollution levels, unhealthy eating habits and sedentary lifestyle have resulted in a host of chronic disorders that many people suffer from. These critical diseases may include cancer, stroke, cardiac arrest, paralysis, arterial problems, kidney failure or major organ transplantation. Depending on the terms and conditions of the policy as detailed by the insurance company, the policyholders may choose to either continue or discontinue the policy. Some insurers hand over the sum assured to the insured on being diagnosed with critical illnesses and the policy ends there and then. There are other companies that give only a part of the sum assured amount to the insured to enable their treatment. However, this affects the final payout to the nominee as it gets reduced to the extent already given by the insurer.
Grievous accidents or critical illnesses may result in permanent disability, thus causing loss of regular income. Opting for this rider while buying the term plan insurance ensures that future premiums are waived off. However, this does not mean that the policy expires. The term plan remains in force and serves similarly to policies with all premiums paid throughout the entire policy tenure. Without this rider option, the policyholder, if unable to pay premiums due to income loss or disability, will not avail the benefits of the policy as initially envisaged. The policy will expire and no death benefits will be paid to the nominee(s) of the insured.
This unique rider is not provided by all insurance companies, and, hence customers must inquire about the same. While term plans guarantee financial coverage in the event of the policyholder’s death, this rider ensures that the nominee(s) or dependents continue to remain covered for a longer period even after the insured is no more. As per this rider, the loved ones of the policyholder continue to get an additional income each year for the next five to 10 years apart from the predetermined sum assured amount. This rider is not inbuilt within the term insurance cover but can be availed by paying an additional premium amount.
Points to be Remember Before You Choose the Best Term Insurance Plans
List Down Your Life Situations – You need to start off by listing down the situations in life you currently have or will encounter in the near future. Situations refer to financially demanding duties and responsibilities. You may be a family person with dependent family members. You may have aged parents to look after. You may have loans to pay back. You may have a serious illness you are fighting. Keep all these parameters in mind. You will then know what type of term insurance coverage you need and for how long. You can appropriately choose the type of cover and stay protected in a wholesome manner.
List Down Your Financial Capacities – Term insurance is largely taken to cover the financial well being of your loved ones after your demise. The term plan cover should, therefore, be large enough to the family’s financial health incorrect margins. Look at the overall economic state of the family. Is there any other income? How many EMIs are being paid each month? How much will your child’s college admission cost? Once you keep track of all these factors, you could easily make a proper calculation and arrive at the ideal term insurance sum assured. Once that is done, look at the type of term insurance that you feel would help you the most.
Make a Budget – As you saw, the insurance premium amounts of different types of term plans differ. A level term plan is cheaper while a TROP is more expensive. You, therefore, need to make a budget beforehand to see what kind of a term insurance plan you can afford. You may want a TROP plan, but the term insurance quote may be too high for you. It is good to buy a plan that you need, but it is never a wise idea to spend more than you can spare. So stay within your budget and find the best possible term life cover for yourself.
Look Online and Compare – Term insurance online is much less expensive. You get some very good deals when you shop online for your term insurance cover. You should, therefore, explore the online options before you make your final purchase. You can also use some very handy online tools like the insurance premium calculator. Enter your personal details and the details regarding your insurance requirements. You will see the premium amounts of the different insurance plans. You can then compare and buy the best term insurance plan at the best rate.
Find a Good Life Insurance Company – Find a good life insurance company to buy your term plan from. Your insurer needs to be the very best and there can be no argument about this. Look for a life insurance provider who has a high claim settlement ratio. Also, try to take your plan from an insurer who has a very good customer support cell. You should be able to reach your insurer whenever you have a query. And finally, look for a life insurance company that has a variety of plans on offer so that you have the liberty to choose.
If you buy your term insurance cover after analyzing these points, you will most likely end up with a very effective and comprehensive cover. So rather than buying your insurance coverage in a hurry, take your time and do some research. Then buy a suitable plan at a suitable rate and stay properly covered.
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