What is a Term Insurance Plan?

What is a Term insurance plan?

Term life insurance plans are a type of life insurance plan which offer risk protection. You pay a premium for a sum assured for a fixed time period. If a policy holder dies within the term of the plan, the nominees get the sum assured called death benefits. No money is paid to nominees if the policyholder survives the term of the plan. Insurers have the beneficial nominee who receives the death benefits on the death of the policyholder. The insurer pays the beneficial nominee only, irrespective of claims of legal heirs.

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What are the Features of a term insurance plan?

Term insurance plan is affordable: A term insurance plan is a pure risk plan with no survival benefits which makes it really cheap. Simplicity makes term life insurance plan affordable. The premiums of term life plans are lower than endowment plans, whole life insurance plans, ULIPs and money back plans.

Term plans are easy to buy: You can easily avail term life plans online. Compare term life insurance plans on an insurance aggregator to get an idea on premiums. Term life insurance requires you to choose sum assured depending on financial goals. Use HLV Calculator to calculate sum assured in a term life insurance plan.

Term insurance plans with return of premium: You may not like term insurance plans because there’s no survival benefit. Insurers also offer the term insurance plans with return of premium. You get all premiums paid on surviving the term of the plan. Term insurance plans with return of premium are more expensive than plain vanilla term life plans.

Staggered payout option: Term life insurance plans offer the staggered payout option where nominees get the payout in stages. If you believe the nominees can’t handle the lump sum or greedy relatives may defraud nominees, opt for the staggered payout option. Opt for staggered payout option when availing the term life insurance plan. The nominees get part of sum assured as a lump sum and the remaining amount in stages.

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Flexibility in term life insurance plans: Insurers allow paying term life insurance premiums monthly, semi-annually or annually. Choose premium paying term as per budget and convenience.

How to Buy Term Insurance Plans?

• Login to the insurer website and click at that place where they advertise online insurance.
• You enter the sum assured.
• You choose the policy term and premium paying term of term life plans.
• Based on inputs you get to see premium amounts.

Importance of Term Life Plans:

• Term life plans are availed by those who have dependents for risk protection. If breadwinner (policy holder) dies within the term of the plan, nominees get money to maintain living standards.
• Term life insurance helps meet financial goals on an unexpected demise. Children get money for education and marriage even if you are not around.
• Term life plans can protect nominees from liabilities. If you have a car loan or home loan, avail term life plans to protect nominees from costly EMIs and loss of property/car from bank seizure.
• Term life plans offer tailor made plans for different types of situations. You have staggered payouts and term plan with return of premium plans.

Why is the premiums charged for taking term insurance policy very low?

Term life plans are pure risk plans. They offer no survival benefit keeping premiums low. Endowment plans offer savings + insurance and ULIP Plans offer investment + insurance. They charge higher premiums for this benefit. Term plans charge low premiums and you can invest the money saved on premiums on investments based on risk tolerance. Most endowment plans even with bonuses offer returns of just 6-7% a year.

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How to choose best term plans?

1. Do a medical test: Insist on a medical test even if insurance agent says it’s not necessary. This helps in claim settlement as insurers would find it difficult to reject claims of nominees. Insurers could reject claims saying the policy holder was a smoker or suffered from pre-existing diseases. Medical report is a safety net in claim settlement for nominees.
2. Don’t look at premiums alone: Don’t avail the cheapest term life insurance plan. Look at coverage offered and claim settlement ratio. This is basically the percentage of policy holder claims settled by insurer. Look for claim settlement ratio above 90. Claim settlement should be a major factor while deciding on an insurer. Of what use is a term insurance plan if nominee claims are not settled?
3. Select right tenure: Choose a term life insurance plan with tenure across working life. If you are 30 and plan to retire at 60, avail term life plans with cover (tenure) till 60. Make sure you are covered across working life. Term insurance plan with cover till 50 is of no use. You would be forced to avail term plans in 50’s at high premiums. Availing term insurance with tenure extending beyond retirement is useless as premiums are high and by then you would have sufficient wealth.
4. Premium paying term: Worried on missing premiums? Opt for ECS mandate where premiums are directly debited from bank accounts. You could also give standing instructions to credit card issuer to pay premiums on time. Choose premium paying term carefully. The monthly paying option may look great but involves a higher payout in the long run. Opt for monthly premiums only if you have monetary constraints.

Is there much difference in premiums across term plans?

Premiums increase with age and tenure. Life insurance plans with higher sum assured or longer tenure charge higher premiums. Term plans with return of premium option are costly as premiums are returned at maturity.  Riders make term life insurance plans expensive.

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Eligibility criteria for term life insurance plans

• Most term life insurance plans have entry age of 18 years and maximum age limit of 65 years.
• Extent of term life coverage depends on income. Under human life value we attach monetary value to human life. The insurer needs to know monetary value (income earning capability) to decide sum assured. This is why income is a consideration for underwriters.
• Most term life plans have maximum maturity age of 75 years.
• Term plan premiums depend on age and sum assured.
• Premium paying term can be monthly or yearly.

Tax benefit on term insurance plans:

Premiums paid on term life insurance plans are tax deductible up to Rs 1.5 Lakhs a year. You can avail term life plans for the tax benefit and save tax.

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