Term Insurance Benefits
A term insurance policy is a must for every person, and one cannot articulate its importance completely. Term insurance plans are the only life insurance products that are specifically designed to solve the sole purpose of protection.
- Cover Critical illness: Together with offering life cover, a term insurance plan also offers protection against critical illness. For an add-on premium amount, Critical Illness cover offers lump sum payment when any critical illness such as kidney failure, cancer, or heart attack, etc. is first detected.
- Higher Sum Assured at Affordable Premiums: Among all the life insurance products, Term life insurance offers the highest life coverage for the lowest premiums during the policy term.
- Tax Benefits: Term insurance premium paid are tax-deductible u/s 80C. In the case of an untimely demise or unfortunate event, the payout received in tax-free u/s 10(10D)
- Waiver of premium payment in case of disability: The insurance provider pays the future premiums in the case of permanent or total disability. Consequently, the policyholder’s life insurance cover continues even if s/he is unable to pay premiums.
- Add-on Protection: A term insurance plan offers an add-on rider with an extra premium, which gives a pay-out in the case of an accidental disability/demise.
- Death Benefits: On the demise of the life assured during the tenure of the policy, the nominee/ beneficiary of the policy receives the total death benefit chosen at the time of commencement. The insurers provide various options of payment for the term plan. These include a lump sum, lump-sum plus annuity, or annuity.
- Maturity Benefits: Term insurance plans don't come with any survival or maturity benefits. If one wants maturity benefits, then an ROP (Return of Premium) plan is suggested, which refunds the premium at the end of the term plan tenure if the insured person survives the period.
Key Features of Term Insurance Plan
Let’s look at the salient features of the term insurance Plan.
- Cost-Effective: Buying a term insurance plan is extremely cost-effective and does not create a hole in the pocket of the individual. The term life insurance premiums are low when compared to any other life insurance products.
- Long-term Protection: Choosing the right term life insurance plan from a long-term perspective will protect your family from any financial liabilities. One has the option to choose a term life cover for up to 99 years of age.
- The Convenience of Payment: One can conveniently make the payment towards term plan premium on a monthly, quarterly or yearly basis. You also have limited payment options to choose from.
- Additional Rider Benefits: Additional optional benefits such as critical illness and accidental death/ disability are also available under the term insurance policy. These benefits can be added to the term plan by paying an additional premium amount.
- Tax Benefits: A term insurance plan comes with excellent tax benefits. You can avail of lucrative tax benefits within Section 80C and Section 10 (10D) of the Income Tax Act, 1961. Moreover, the term life insurance premiums paid for the Critical Illness Benefit towards the term plan, also qualify for a deduction within Section 80D.
Note: Tax benefits are subject to changes in tax laws. Please consult your tax advisor for details.
Factors that affect Term Insurance Premium
Listed below are some of the major factors that affect term insurance premium:
- Age: It is a general belief that when a person is young, then they are less prone to life-threatening diseases. This means that a young person will be paying more term plan premiums as the policy term would be long when compared to someone who is old and most likely will make term insurance claims soon.
- Gender: As per some studies, it is believed that women tend to survive for a longer span in comparison to men. This implies that women will end up paying more term insurance premiums, which means that the premium amount will be low comparatively.
- Policy Term: The longer is the policy term, the more will be the term insurance premium as the insurance provider will have to provide cover for a long time which means higher risk. Therefore, a shorter-term plan will have a low premium when compared to the long-term plans.
- Profession: In the case of individuals involved in job profiles with a probability of high risk of accidents such as transport, mining, shipping, defence etc.., the term insurance premium for such profiles will be higher when compared to the job profile of someone who has a desk job.
- Individual Health: In case an individual has a common disease or illness such as obesity, the underwriters will scale the person on a high risk. For instance, in the case of an obese person, there are chances of high blood pressure and heart-related ailments that could even lead to stroke. Under such circumstances, the term insurance premium will be on a higher side when compared to the person who is physically sound and fit.
- Smoking/ Drinking Habits: This is one key factor that affects the term insurance premium. There are high chances of health concerns due to the regular consumption of alcohol or smoking as it might affect the individual adversely.
Term Insurance Buying Guide
To select the best term insurance plan, a purchaser should look into the following factors:
- Claim Settlement Ratio: The record of term insurance claim settlement provides a clear picture of the insurance provider to the prospect policy buyers. The ratio of claim settlement is released by the Insurance Regulatory and Development Authority (IRDA) India every year. A claim settlement ratio that is consistently good indicates that the insurance provider has been quick and robust in its claim settlement process.
- Terminal/Critical Illness Benefit: A critical medical issue such as brain surgery or cancer costs a lot of money and cripples the finances of the family. However, if a term plan chosen by a policyholder covers critical illness or if it has the feature to add on critical illness cover in it, then one can easily safeguard self from such risks. Most of the critical illness add-ons immediately payout upon diagnosis of the critical illness.
- Company Reliability: The reputation of a company and stability is very important in any sector of business, especially in the sector of life insurance for the customers to trust. Before zeroing in on a plan, it is important to check the credibility of the insurance company.
- Premium: The premium rate of a term plan plays a vital role while purchasing the plan.
- Waiver of Premium Rider: If the policyholder gets affected by some terminal illness, then all the future premiums for his/her term policy will be waived off.
- Solvency Ratio: The solvency ratio is something that tells whether the insurance provider chosen will be capable financially of settling the claims if the requirement arises. As per IRDA, every life insurance provider should maintain a solvency ratio of 1.5 at least.
- Riders: While purchasing a term plan, it is important to check the rider benefits offered by the term insurance company in a detailed way. An insurance rider is extra to the essential plan which offers advantages far beyond the subject of the policy in case of any eventuality.
Who Should Buy a Term Insurance Policy
Any individual with financial dependents should consider purchasing an online term insurance policy. This includes young professionals, parents, married couples and people who want to gain tax benefit as term insurance plan provides tax benefit under section 80C of Income Tax Act 1961.
- Parents: Parents are generally the sole breadwinners of the family and the only financial support for their children. Thus, the best way to secure the financial future of the children is to have a term insurance policy.
- Newly Married: A term insurance policy works as a financial safety net for your spouse in your absence while also taking care of your liabilities.
- Young Professionals: Purchasing a term insurance policy at a young age is more beneficial as compared to buying a policy at an old age. This is because, the term policy offers a very low premium rate to the young individual as compared to the old policy buyers.
- Taxpayers: Along with the benefit of life coverage, one of the major advantages of purchasing a term insurance policy is that, it offers the benefit to save on taxes. The premiums paid towards the term policy are tax exempted u/s 80C of the Income Tax Act.
Term Insurance Riders
Riders are the add-on coverages which can be purchased by the policyholder along with the basic term plan in order to enhance the coverage of the policy. The rider benefit can be availed by paying an extra premium to the insurer along with the basic premium of the term policy. Some of the riders offered with term plan are:
- Critical Illness Rider: With this add-on, the insurance holder receives a lump sum amount in case of valid diagnosis of any critical illnesses as pre-specified in the policy.
- Waiver of Premium: Under this rider, in case the life insured fails to pay the future premium of the term policy due to a disability or income loss, then all the future premiums of the term plan are waived off and the policy continues to remain active.
- Accidental Death Benefit Rider: Under this rider benefit, an extra sum assured amount is paid to the beneficiary of the policy along with the basic sum assured amount in case of accidental demise of the insured person.
- Accidental Total and Permanent Disability Rider: This is an add-on rider benefit offered by the term insurance wherein, an extra sum assured amount is paid to the policyholder in case; he/she suffers from an accidental permanent or partial disability.
How Much Term Insurance Cover Does One Need
There are various factors which determine how much term insurance coverage one should take. For the convenience of the insurance buyers, here we have discussed some of the factors.
- Current Expenses: The monthly expenses of the Insured individual and his dependents needs to be covered in case of the insured’s unforeseen demise.
- Current and Future Liabilities and Assets: While determining the sum assured amount of the term insurance policy, it is important to consider the loan instalments like home loan, personal loan, car loan, etc. and the EMIs that the term insurance buyers have opted for. As the liabilities and monthly assets also include investments such as fixed deposit, ELSS, ULIPs, gold, capital market, etc., it is always important to leave room for such investment and decide the coverage amount of the term plan accordingly.
- Future Financial Goal for Family and Self: Keeping the long-term and short-term financial objectives of life, the insurance buyers should determine how much premium they can pay towards the policy and how much coverage they need to secure the financial future of their loved ones and family.
- Needs Analysis/Human Life Value Calculator: helps the policy buyers to get an idea of how much sum assured amount they require for a term insurance policy. The human life value calculator calculates the sum assured amount based on the simple formula of time value for money. An individual just needs to enter certain details such as the current age, expenses, present yearly income, and estimated future inflation rate, to get the sum assured amount that they should opt for. To know the right cover amount for you, please use the calculator here.