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Why is term life insurance a must?

    IndianMoney.com Research Team | Thursday, August 06,2009, 07:32 PM
 

The primary objective of life insurance is to provide financial protection for your family in case of policy holder’s death. It helps you to ensure that your family and loved ones will have sufficient money to fulfill their needs in your absence also.

Term plan is the pure form of life insurance or in other words we can tell that it is a pure risk cover plan in which the insured pays a lower premium for a higher sum assured. Term insurance is the cheapest among other forms of life insurance; it helps the policy holder to insure himself for a larger amount at a relatively low premium. As we mentioned earlier insurance is not a place to park your investments, the ultimate objective of insurance is to provide financial assistance to your family in your absence. Term plan helps you to cover your life with a very less premium, so that you can invest the major part of your savings in some other productive investments. If a person is return sensitive investor or he is looking for returns from his investments, term plans are not suitable for them. Most of the term plans doesn’t give any returns if nothing happens to the life insured. There are some plans it return the premiums paid if the individual survives the tenure.

Term plans are cheaper than other kinds of insurance because of their lean cost structure. In term plan’s premium only administration expenses and the mortality charges are covered. There is no savings element in the premium charged to the insured. As a result of this, if the insured were to survive the term of the plan, he gets no returns. In fact the premiums paid towards this plan are entirely written off if no eventuality occurs during the tenure of the plan. Only in case of an eventuality your nominee will receive the sum assured. At the same time if you are considering insurance as an investment you have to go with Endowment plans or ULIPs. But here the charges will be very high because these plans will impose allocation charge, fund management charge, etc. apart from the mortality charges and administration charges.

In life insurance terminology, endowment plans are referred to as ‘with-profits plans’. They cover the individual’s life in case of an eventuality; if he survives the term he receives the maturity amount. In the happening of the individual’s demise, his nominees receive the sum assured with accumulated profits/bonuses on investments. In case the individual survives the tenure, he receives the sum assured and accumulated profits/bonuses.

As a whole life Insurance is a powerful tool to cover your unforeseen risks that can affect your family in your absence. It also works as a saving instrument which can help you in planning for your children’s education, daughter’s marriage, pension, retirement benefits or for any other defined objectives. Factors you should consider before buying term insurance are :

  • Adequate Sum Assured.
  • Rider benefits.
  • Claim History of the company you are purchasing insurance.
  • Competitive Pricing.
  • Administrative Costs.

Types of Term Insurance policies

Term insurance policies can be classified into different types, some of the major categories of term insurance are listed below;

  • Single-premium term policies
  • Regular-premium term policies
  • Term policies with return of premium
  • Loan cover term insurance

Single-Premium Term Policies

Single Premium Term policies are those there you have to pay the premium in a lump sum amount. The policy will cover your life for a predefined term. This plan helps you to escape from the burden of paying the premium every year. Pay the premium once and forget, it will give you cover for a predefined term. Compared to regular premium plans the premium will be high in this plan because you are paying money only once where as in regular premium plan you will be paying the premium every year.

Regular-Premium Term Plans

Regular-Premium Term Plans offers you the option to pay the premium on a yearly basis. If you don't want to make a huge one-time payment, go for this option. You will have to pay the premium every year till the end of the insurance term.

Term Policies with Return of Premium

Normally in Term plans, if the policy holder survives the policy term nothing will be returned to him. You will lose all the money that you have paid. But in this plan you get back all the premiums you paid. It could be with or without interest. Biggest advantage of this plan is if you survive the maturity, no money is lost. But you have to pay a heavy premium every year, it will be much more than the regular premium policies.

Loan cover Term Insurance

This policy is meant for the people those who have taken home loans. The insurance amount will be equivalent to the outstanding loan amount. It gradually decreases, in the same proportion, as the loan amount is paid back. The premium here works just like the Equated Monthly Installment (EMI) of the home loan. It stays constant through the repayment period. This kind of policies assures the insured that, in an eventuality like death, his/her family will not be burdened with the repayment of heavy debt.

Advantages of Term Life Insurance over other Insurance

Term Life Insurance has the following advantages

  • Helps to Settle Loans
  • Flexible Duration
  • Inexpensive
  • Investment
  • Suitable for Satisfying Particular Requirements

Helps to Settle Loans

Loans are generally repayable over a period of years. When an insured takes a loan for car or house or other movable and immovable properties he is under the responsibility to repay it over a period of time. During such circumstances an insured can take a term loan in order to ensure that his dependents have sufficient cash to repay them in the event of his unexpected death in that period.

Flexible Duration

This is the only type of life insurance policy whereby an insured can insure his life for a period small duration like one year. This type of lenience will help the insured to properly plan and assign the sum required to make the payments. In the absence of such flexibility the insured will be enforced to oblige with the time limits set by the company for the respective policy.

Inexpensive

Even though term insurance premiums increase over a period of time they are still considered inexpensive when compared with other kinds of policy. Cheap term life insurance does not mean that the consumer will lose quality or benefits. This can help the customer even to save money in the initial stages which he/she normally pays in other policies. On the contrary when the premiums are increased the insured will be able to make use of the cash mounted up to pay the remaining premiums. In the meantime the earlier deposits would have earned interest as well. Therefore the customer will be able to obtain cheap life insurance quotes.

Investment

Compared to a whole life insurance policy, term life insurance policy costs are very cheaper. It helps you to invest your money in some other productive investments where you are invested. This means that you can invest your money yourself instead of depending on the insurance company. Insurers are typically very conservative when investing your money, so by taking a term life insurance policy you can enjoy more freedom in choosing the investments.

Suitable for Satisfying Particular Requirements

Term insurance is not only useful for settling loans but also for others particular requirements. Suppose a person wants to build a house or fund his child's education in an expensive university he can place targets and invest in a term insurance for that particular period. This will help him to meet critical events which would have otherwise been very difficult.

Drawbacks of Term Life Insurance

Some of the disadvantages of term life insurance are as follows :

  • Premiums Increase with Age
  • Temporary Protection

Premiums Increase with Age

Term insurance policies require the insured to pay a lower amount in the beginning; as a person gets older he needs to pay a higher amount of premium. This will show to be a difficult task if the person is not able to allocate funds regularly. In addition the insured may have more commitments and some of them might be unexpected. Therefore the concept of cheap term life insurance seems to be a myth when a person is not able to meet the policy demands at this stage.

Temporary Protection

In a Term Plan the insured may not be able to enjoy permanent protection like a permanent life insurance policy. The insurance policy covers risks of death only during the specific term. This places the insured in a disadvantage because if he is not able to renew the policy and pay higher premiums he will lose the protection thereafter. The insurance company will not refund the money if the insurer does not die in that particular period.

This type of insurance is observed to be the best especially when it is not possible to allocate a huge sum but at the same time the customer is badly in need of insurance. There is no precise time for term insurance; it can be for a period of 1, 5, 10 or 15 and even 30 years. The insured has to choose that particular time which is convenient for him.

6 points to remember while choosing a Term Plan

Following are the points that you should keep in mind while selecting a Term Plan.

  • First of all understand the concept of term insurance like what is means, how it works, what are the benefits, etc.
  • All term life insurance companies are not the same. Try to find out the financial strength of the company you are seeking to buy from.
  • Compared to whole life insurance, term life insurance is very cheap. It is cheaper because it is designed to cover you only for a certain period of time. If you want to cover your whole life, term life insurance is not suitable for you.
  • Term Life Insurance is good if you want to cover your family and your home in the event of your death. If you have a home loan, you can purchase a term insurance policy for the amount of home loan. This ensures that you family will not lose their home, in case of your premature death.
  • You should always prefer a guaranteed renewable policy, so that your coverage cannot be terminated if you have any kind of health problems in future. If you are purchasing a guaranteed renewable policy company has the responsibility to renew the policy after the predetermined term even if you are suffering from some health problems.
  • Choose only convertible Policy
    a It is very important to remember that while choosing the term insurance you should make sure that the policies are convertible, so that you can switch to other plans later if needed. If you do not prefer the convertible policy, till the end of the policy term you should have to continue with the same Term plan, you won’t be having the option to switch to another plan.

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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