Term Insurance Meaning

Term insurance is a type of life insurance scheme that provides an individual coverage for a certain tenure or a specified "term" of years. A death benefit will be paid out to nominees if the life assured dies during the policy tenure provided the policy is in force or active. When compared to whole life insurance, term insurance is usually much less expensive. Term insurance has no cash/maturity value unlike most types of whole life insurance & other plans with maturity benefits. In simple words, the only value is the guaranteed death benefit from the term plan.

Understanding the Concept of Term Insurance

There are a number of different term insurance policies available. Many policies offer level premiums for the tenure of the policy, such as 10, 15, or 20 years. These are often called "level term" policies. The premium is an amount that is paid periodically by the insured to an insurer for providing risk coverage and the benefits that come with the insurance policy.

The insurance company calculates the premiums based on the individual's age, health, and life expectancy. A medical exam is conducted that reviews the person's health and previous illnesses. Also, the family medical history might be asked depending on the chosen policy.

The premiums are fixed and payable during the policy term as per the chosen frequency. If the insured individual dies prior to the expiration of the policy, the insurance company will pay out the sum assured as a death benefit to the nominee of the policy. If the policy expires and the individual dies afterward, there would be no payout or coverage to the nominees. However, the insured can renew or extend the insurance, but the new monthly premium will be based on the person's health and age at the time of the renewal. As a result, the premiums can be higher for the renewed policy versus the original one that was initiated when the individual was younger and had better health.

Premiums can range depending on the amount of coverage, health, age & other factors. For example, a 30-year policy with a sum assured of Rs. 25,00,000 can range from Rs. 1500 per month for a person in their twenties to more than Rs. 6,000 per month for someone in their fifties. Of course, each insurance company might have different rates depending on the policyholder's age, health, family history of diseases, and other factors.

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Key Features

Term Insurance Riders:

Once an individual knows what is term insurance and has thought to buy one, he/she can consider adding riders to the plan as per the requirements. The optional riders will help to extend the benefits by paying an additional premium. These riders are not mandatory but one can opt for them easily.

Life Cover Against Eventualities:

If an individual is the sole bread earner of the family, he/she can help secure their family against any uncertain financial setback they might have to go through in their absence through a term insurance policy. The policy enables individuals to support and secure a worry-free financial future for their families. One can easily have a significant life cover for a comparatively small premium payable under these plans.

Cover for Critical Illnesses:

In the age of 20s and 30s, the individuals may think that they will never suffer from a critical illness. However, unfortunately, if it happens, not only will the health deteriorate, but also they could lose their hard-earned corpus to get the necessary treatment. Although the general term insurance plans offer a death benefit, one can conveniently increase its coverage with a critical illness rider.

As the name suggests, a critical illness rider provides additional benefits when attached with the term insurance policy i.e. if an individual gets diagnosed with an illness covered under the rider, a lump sum amount will be provided to help avoid any financial setback that the family might have to go through for getting the required treatment.

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Multiple Payout Options:

If an individual feels that his family members do not have the necessary know-how of handling a lump sum amount of money received a death benefit under the term insurance policy, he/she can go for multiple payout/installment options.

For example, one can opt for term insurance plans that offer to pay a fixed amount every month to your family along with a lump sum immediately on death. This way, the term insurance policy will also become a source of regular income for the family.

Cover for Disability or Accidental Death:

Accidents can happen anywhere and anytime. Depending on the situation and severity, an individual may need a good amount of money for the medical expenses to be incurred and compensate for the loss of income. Term plans help one to tackle these types of scenarios with a disability and accidental death benefit rider.

Who Should Buy Term Insurance Plan ?

Generally, these plans can be initiated as soon as an individual starts earning. The term insurance plans hold more importance in the case when one has financially dependent family members. Whether an individual is of 18 years or 65 years, term Insurance keeps them covered.

What is the Right Time to Buy ?

The answer to this is one should opt for an ideal plan as early as possible. The early an individual opts the better it will be. Buying an ideal plan ensures that you obtain the desired coverage for life. Adding to it, buying term insurance at an early age of life means that the premium will be less when compared to the times if bought at a later age in life. The moment an individual realize that they have financially dependent members, they should immediately look for an ideal plan. In case one has missed buying the plan, he/she should not neglect this and consider buying the same as it’s always better to be safe than sorry.

Types of Insurance

The different types of term insurance plans have been discussed below:

Level Term Plans:

This is the general and simplest form of a term insurance plan where the sum assured does not vary during the tenure and benefits are paid out to the nominee/family on the death of the policyholder.

Return of Premium Plans:

Unlike level term plans, here the plans have various maturity benefits, wherein the premiums are returned to the insuree if he survives till the expiry of the policy.

Increasing Term Plans:

In this plan, an individual can opt to increase the sum assured at annual frequency during the plan tenure while keeping the premiums intact. The premiums for this type of plan will be different than that of other plans.

Decreasing Term Plans:

It is the opposite of the increasing term plan. Here the sum assured declines year after year so as to match the decreasing insurance needs of the insuree. These plans are mostly opted for when someone has taken a large personal loan, home loan, and paying EMIs. The sum assured declines with a chosen frequency as and when the total loan amount keeps declining.

Convertible Term Plans:

This is a plan offered by some companies wherein a term insurance plan can be taken with an option to convert it into some other plan of choice at a certain date in the future. For instance – An individual has taken a term plan for 2 decades but after 5 years he can convert this into an endowment plan, full life insurance plan, or any other plan of his choice.

Term Plans with Riders:

This is a unique plan whereby an individual can buy riders like accidental benefit rider, disability rider, critical illness cover, etc. by paying a petty additional premium. If an individual opts for a rider and go for a premium waiver benefit, then he/she needs not pay the future premiums in case of any circumstance arising for which they have taken the rider.

Tax Benefits

These plans come with significant tax benefits. An individual can avail of lucrative tax benefits under Section 80C and 10(10D) of the Income Tax Act, 1961. Moreover, the premium paid in these plans for critical illness benefits also qualify for a deduction under Section 80D of the Income Tax Act,1961.

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