Term insurance is a form of insurance that is for a fixed period – or specified ‘term’. This term is typically between 10-30 years. If the insured dies during this period when the policy is active, a death benefit is paid out to the nominated beneficiary of the policy. Term insurance provides a fixed amount of coverage for a specific period of time.
Let’s take as an example Mr. X (the insured), who takes out a 20 year policy for Rs 50 lakhs with an insurance company (the insurer). He pays his premiums regularly on a monthly or half yearly or annual basis. If he dies before the 20 years, when the policy is still active, his nominee will receive Rs. 50 lakhs. If he survives the term of 20 years, he will not get any pay out. This is different from other forms of life insurance which pay out a maturity benefit even if you survive the period of the policy.
Term insurance is temporary – i.e. only for the duration of the policy – and is therefore less expensive than permanent life insurance. However, after the expiry of the ‘term’ the policy can become very expensive.
Why is the premium for term insurance low?
The premium for term insurance is the lowest among all forms of life insurance as there is no investment involved and all the money paid out in premiums is used to provide protection against risk. There is no maturity benefit once the term expires.
Aspects of term insurance:
1.Eligibility: The minimum age of entering into term insurance policies is 18 years and the maximum age limit is 65 years.
2.Missing a premium payment: Some companies offer a grace period for missed half yearly or annual premium payments and a shorter grace period for missed monthly payments. If you have missed a premium payment, check immediately with your insurer or insurance agent on the applicable rules.
3.Criteria to consider when choosing term insurance: First, determine the amount of coverage you require and the time period; check the reputation of the insurance company; check their claims settlement ratio; learn the terms and conditions of your term insurance policy – a low premium may come with several unfavourable conditions that might not suit your requirements; identify which companies offer discounted rates on premiums – for example, non-smokers might be eligible for a discount.
4.Nature of pay out: Some companies may offer the choice of a recurring or one-time pay out. You can choose which one will suit your family’s needs best.
5.Online purchase: Many leading insurance companies offer the option of buying a plan entirely online. Subject to their conditions, you will be able to buy a plan online without undergoing a medical test.
6.Opting for riders: Many insurance companies offer riders (additional options) that enhance the value of the term insurance plan. For instance, if you opt for critical illness cover, you are assured of lump sum in case you are diagnosed with a critical illness during the tenure of the plan. Similarly, there could be riders for loss of income cover or disability cover. You need to evaluate the risks and requirements in terms of yourself and your family and choose a plan accordingly.