Term insurance is a type of life insurance plan. It’s a pure risk protection plan. You pay a specific premium at fixed intervals (say once each year), across the policy term. On death of the policyholder within the term, the nominees get the sum assured also called death benefit. If you survive the term of the plan, there’s no survival benefit.
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Avail term insurance not for yourself, but for your loved ones. If you have dependents (you are the breadwinner and your family depends on your income), avail term life insurance. Term insurance guarantees your family is protected in case of an untimely death. Your family leads the same lifestyle they currently enjoy, even in your absence.
Term insurance makes sure you don’t leave a loan behind for your family to repay. Let’s say you have availed a home loan, car loan and a personal loan and are struggling with the EMIs. If something untoward happens, how will your family pay the EMIs?
Its absolute irresponsibility on your part, not availing a term life insurance plan. If you avail a term life insurance plan, your family can live on the death benefit and repay loans and other liabilities, on an unexpected demise.
SEE ALSO: What is a Term Life Insurance Policy?
Term insurance has low premiums unlike other life insurance plans like endowment life plans and ULIPs. Avail term insurance at a young age (say when you have just started working), as premiums are low in your 20’s. Term insurance is the simplest and most affordable life insurance. It offers high cover at low premiums.
Premiums paid on term life insurance plans enjoy a tax deduction up to Rs 1.5 Lakhs a year under Section 80C of the income tax act. The death benefits (sum assured) received by the nominees is completely tax free under Section 10(10D) of the income tax act.
Term insurance offers a lump sum to the nominees on death of the policyholder within the term of the plan. If your nominees/loved ones are not good with finances (cannot handle money well), there’s a chance the death benefit would be squandered. Relatives and friends could exploit the situation and the money would be lost. The basic purpose of the term life insurance is lost.
Insurers also offer the monthly payout option or the staggered option. Instead of a lump sum, the nominees may get 10% of the sum assured on death of the policy holder and the rest in monthly installments over 15-20 years. Even Online term insurance also offers the staggered payout. You may get 50-60% of the sum assured on death of the policyholder and the remaining amounts are paid in monthly installments. This is regular income which can support your family even when you are not around.
You can opt for part sum assured and part monthly income in equal proportions. The nominee gets sum assured and monthly payouts in equal proportions. The monthly payout can be tailored to beat inflation. The sum assured and monthly income increases by 10-20% each year. This helps your loved ones beat inflation. The staggered and payout option is useful if your family cannot invest a lump sum and manage the money.
Riders are additional benefits offered at slightly higher premiums. Some of the popular riders are accidental death benefit rider, accelerated death benefit rider, critical illness benefit rider, waiver of premium rider, income benefit rider and so on. Riders strengthen the term life insurance plan by offering multiple benefits. This is apart from the core death benefit. Riders can be a part of the term life insurance plan or may be purchased separately by paying additional premiums.
Drawbacks of term insurance and how to overcome them:
Drawback 1: It’s popularly believed that as term life insurance offers no survival benefits unlike Endowment life plans, it’s a bad bargain. This is viewed as a drawback.
Drawback 2: Wealth creation is not possible with term life insurance
In reality term life insurance is the best life insurance plan around. The premiums are low vis-à-vis endowment plans and ULIPs. Term life plans being pure risk protection offer high mortality cover at low premiums. You can invest the difference in a very good investment (equity or debt) depending on risk profile.
Endowment plans offer insurance and savings. Part of the premium paid is used for mortality cover and the remaining is invested in fixed income investments. Returns from the endowment plan including bonuses are around 5-6% a year. The mortality cover of endowment plans is insufficient and so are the returns. Term insurance scores over most life insurance plans as it offers high mortality cover. The difference in premium between term plans and endowment plans can be invested in excellent investments based on risk profile. You earn higher returns than endowment plans and this comes handy for children’s education and marriage and even retirement needs.
Drawback 3: Term Life Insurance Doesn’t Give Income When you are Alive
Why do you avail life insurance? Isn’t it to provide financially for loved ones in your absence? Term life insurance is pure risk protection. (It offers high mortality cover). Do you avail life insurance to earn money or to provide for loved ones in your absence?
Drawback 4: Term Life Insurance has no Surrender Value:
If you surrender the life insurance plan before it completes the full term, you get back a part of the premiums paid after charges are deducted. This is the surrender value. Term insurance has no saving or investment component and doesn’t acquire surrender value. Term life insurance is pure risk protection and you avail it for loved ones. This plan is for mortality cover and not for savings or investments.
The term life insurance plan which comes under the purview of MWP Act, functions as a trust. Only the trustees have control over the term life policy. The proceeds of the plan cannot be claimed by creditors, relatives or even form a part of a WILL. (This is estate of the proposer). The trust holds the life insurance proceeds for the benefit of your wife and children. The future of your wife and kids is secure.
Let’s say you are a salaried employee who has availed a home loan or a personal loan. You could be the owner of a business which has acquired sizeable debts. On death of policyholder without repayment of dues, the bank or creditors have the first claim on term life policy proceeds. Your wife and kids won’t get the money from the term life insurance plan. This is why you must avail term life insurance under MWP Act.
Under the revised insurance (amendment) act 2015, you have the beneficial nominee category. Under beneficial nominee, the nominees like spouse, parents and children are the final recipients of the term life plan proceeds.
A husband could nominate his wife and kids as beneficial nominees for the term life insurance plan. No one can challenge the rights of the beneficial nominee for the proceeds of the term life insurance plan.
But, the husband could change the beneficial nominees of the term life plan. Under the influence of family members or in case of a divorce, beneficiaries could be changed at a later stage. The rights of creditors supersede the beneficial nominee.
If you avail the term life plan under Section 6 of the Married Women’s Property Act (MWP), it gives special protection to wife and kids. Creditors don’t get the proceeds of the term life insurance plan.
The MWP Act applies to term life plans, endowment plans and even money back plans. If the term policy is covered under MWP act, proceeds go only to wife and kids. Even the husband has no control over the proceeds. Any married man can avail term life plan under MWP Act. However, do note that the term life plan under MWP Act cannot be added separately. It must be availed when buying the term life plan.
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