Aditya is a 30-year old individual looking to insure his life. He works in a reputed MNC, has two kids and is the primary breadwinner of his family. He wants to ensure that his wife and children are financially protected, if something unexpected happens to him.
However, researching the different life insurance plans in the market leaves him feeling confused and overwhelmed. Most insurance policies have hefty premiums that are beyond his monthly budget. Also, the different policy types, various bonuses, premium payment terms, policy coverage and other myriad terms and conditions leave him confused. As a result, he puts off purchasing the policy, leaving him and his family unprotected without the essential life cover.
Aditya isn’t alone. There are several people like him, who find it difficult navigating the various insurance policies available on the market. Here, in this guide, we introduce you to one of the simplest and highly effective life insurance plans – the term insurance plan.
What is term insurance?
Term insurance is the simplest and most affordable insurance policy. It offers a high sum assured with minimal premiums. It is ideal for individuals who are looking to financially protect their family, after their death.
Term insurance plan is a type of life insurance policy. It gives policyholders complete peace of mind, knowing that their family is financially secure, if something unexpected were to happen to them.
The policyholder pays specific premium amounts at fixed intervals – monthly, quarterly, half-yearly or annually. If the policyholder passes away during the policy term, the nominee(s) receives the sum assured that is guaranteed during policy purchase. There are no survival benefits. Meaning, if the policyholder survives the policy term, there are no benefits dispensed. Hence, it is often referred to as “pure life plan.”
Term insurance plans are easy to understand and quite affordable. For instance, it is possible to get a high life cover of Rs. 1 crore with premiums of just Rs. 20,000 per year. The main reason why term insurance is so affordable is because 100% of the premium amount is allocated for life cover.
How does term insurance work?
The working of a term plan is straightforward and easy to understand. The policyholder pays premiums during the premium payment term, which is usually up to 60 years. Policy coverage is offered for the duration of the policy term which is predetermined. Some term plans offer life coverage up to 75 (or 80 years), while others offer coverage up to 100 years.
If the policyholder dies unexpectedly during the policy term, the insurance provider pays the pre-determined sum assured to the beneficiaries. This is known as the death benefit. On the other hand, if the policyholder survives the duration of the policy term, then no other benefits are paid.
To sum it up, in a term plan, the sum assured is paid only on the death of the policyholder. There are no other policy maturity benefits.
Why purchase a term insurance plan?
The top reasons to buy a term insurance plan are:
Secures your family’s future
The death benefit offered by the term plan acts as a financial net for your family, if something unexpected were to happen to you. This amount can help your family get back on their feet, after the demise of the primary breadwinner.
High life coverage
One of the biggest benefits of term plans is that they offer a high life coverage amount at affordable premiums. For instance, it is possible for a healthy 30-year-old to get a life cover of Rs. 1 crore with a premium of just Rs. 500 per month. Low premiums make term plans affordable for individuals of different earning levels.
Accidental death benefit
Most term plans offer additional protection to your family, if you meet with death due to an accident. In such cases, on top of the sum assured your beneficiaries receive additional payouts.
Critical illness coverage
Besides securing your family’s financial future, new-age term plans also offer you coverage against critical illnesses. If the policyholder is diagnosed with a critical illness like cancer, heart failure, kidney failure, etc. the insurance provider offers a lump-sum payout that can be used for medical needs.
Coverage for Permanent Disability
In certain term plans, the insurer waives off all future premiums in case of permanent disability of the policyholder due to an accident. The policy continues to remain in force, even if the policyholder is unable to pay future premiums.
Premiums paid for term plans are eligible for tax deductions under Section 80C of the ITA. Additionally, plans that offer critical illness cover are eligible for tax benefits under Section 80D. The sum assured received by your family as death benefit are eligible for tax benefits under Section 10(10 D).
Factors to Know before Purchasing a Term Insurance Plan
Claim Settlement Ratio (CSR)
The CSR indicates the total number of claims settled by an insurance company in a year. Higher the CSR ratio, the more are the chances that the insurance company will honour your claim.
This ratio indicates the ability of the insurance company to honour claims. Look for insurers with a solvency ratio of 1.5 or more.
Critical Illness Cover
Term plans that offer critical illness cover provide lump sum payouts to the policyholder on diagnosis of a critical illness. The critical illness cover helps families meet emergency medical needs.
These are additional riders that extend the coverage of the plan. Look for plans that offer multiple riders like accidental death benefit, waiver of premiums, etc.
This is the amount the insurer pays to your family on your death. The premium of the policy depends on the chosen sum assured.
Premium Payment Term
This is the term for which you have to pay the policy premiums. It can be 5, 10, 20 years or more. Some term plans offer the option of paying a single bulk premium, as well.
This is the duration for which the policy is active. Generally, most term plans offer coverage up to the age of 75 or 80, while certain new-age plans offer coverage up to 100 years.
Term Insurance: Common FAQs
1.How much life coverage should I choose in a term plan?
While choosing a term plan, you have to decide the life coverage you require. The life coverage (also known as sum assured) is the amount paid to your family, after your death. While the required life coverage varies based on individual lifestyles and financial commitments, here are certain rules of thumb to help you decide on the amount.
|Age of the Policyholder during Policy Application||Life Coverage Amount|
|Up to 35 years||25 times of your annual income|
|36 – 45||20 times of your annual income|
|46 – 50||15 times of your annual income|
|51 – 60||10 times of your annual income|
To give an example, let’s assume a 30-year-old individual with an annual income of 6 lakhs. The ideal life cover for him would be 25 * 6 = Rs. 1.50 crores or more.
2.How is the premium determined?
The premium of the term plan depends on several factors like – age of the policyholder, gender, family and personal medical history, residence location, BMI, lifestyle, occupation and more. You can use an online premium calculator to figure out the premium for you.
3.What are riders?
Riders are add-on benefits that extend the protection offered by the term plan. Policyholders can opt for required riders at a nominal rate during policy purchase. Some of the common riders include:
Critical illness coverage
Accidental death benefit
Permanent or partial disability
Waiver of premium
4.What is critical illness coverage?
If the policyholder is diagnosed with a critical illness, then the insurance provider pays a lump sum amount while the policyholder is alive. This add-on benefit helps in meeting the medical costs of critical illness treatments.
5.Do term plans cover the death of the policyholder outside India?
Yes, generally most term plans offer life coverage, even if the policyholder passes away outside India, while on travel. However, some insurance companies reject claims if the policyholder meets with death when travelling to countries that have been marked unsafe. Get in touch with your insurance company for further details.
Opt for a Term Plan and Secure your Family’s Future
You can quickly purchase a term plan online without any hassles. Compare the different policies available and choose the best one that offers you maximum protection at affordable premiums.