How Does Term Insurance Works?
Financial stability for thе pеoplе wе lovе is our top priority in thе currеnt unprеdictablе world. Tеrm insurancе acts as a trustworthy framework for safety, giving pеoplе the assurance that their family would bе wеll-off еvеn in thе evеnt
of their passing. Howеvеr, how doеs tеrm insurancе opеratе and what distinguishеs it from othеr insurancе options? Thе working, advantagеs, and important factors of tеrm insurancе arе covеrеd in detail in this article.
What is Term Insurance?
Term insurance is one of the most popular types of life insurance, it provides coverage for a set period, known as the term. The term typically lasts between 10 to 40 years. If the insured passes away during the term, insurance company provides the
policyholder's beneficiaries with financial security. It is crucial to understand that term insurance only provides a death benefit, unlike other life insurance policies that
provide lifetime coverage. If, in case, the policyholder outlives the policy term then there'll be no payout or maturity.
The cost of buying term insurance is less than the whole life insurance but it lacks the maturity payout factor.
How Does Term Life Insurance Work?
The below key pointers help you understand how Term Life Insurance works:
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Agreement between insured and insurer
A term life insurance policy is a legal contract between the policyholder and the insurance provider. The person who pays for the life cover is the policyholder. However, you can buy life cover for yourself or your family members. To keep your plan active, you've to pay a pre-decided premium. In exchange, the insurer pays a death benefit to beneficiaries in the event of the policyholder's untimely demise within the policy tenure.
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Filling Out the Proposal Form
To opt for a life cover, you've to provide the following information in the term plan application form:
- Gender
- Educational qualifications
- Medical history
- Present Health conditions
- Lifestyle habits
- Age
- Annual income
- Nature of your profession
The insurer estimates the health risk and provides adequate premiums based on the data. Here, we've listed a few factors that can elevate the premium amount:
- Higher age
- Risky hobbies such as scuba diving, racing, potholing, etc
- Unhealthy addictions like smoking & drinking
- Risky professions
- Chronic health problems
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Assessing Your Requirements
Before opting for life insurance, you must assess requirements, such as:
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Deciding your life cover
Some policyholders make the general mistake of choosing inappropriate life cover. So it is necessary to decide on appropriate life cover based on your financial needs.
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Choosing the policy tenure
Opting the right policy tenure based on your requirements helps to take appropriate benefit of the term insurance.
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Picking a premium payout option
An individual has to choose which type of payment option they will opt for. There are several payout options available such as lump sum or one-time payment, monthly payment, or a combination of both.
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Selecting the payout option
An individual has to select how the payout will be available to your beneficiary. They can either choose a lump sum payment, or a monthly payout to meet their monthly expenses.
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Adding optional riders
Additional riders help an individual enhance their coverage. Various riders include accidental death benefit riders, critical illness riders, etc.
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Assigning a Nominee
You must nominate the beneficiary who will get the death benefit after your demise. However, the policyholder should ideally choose a responsible person whom they can trust to fulfill their family's requirements.
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Review the Premium
Based on your data, the insurer reviews a premium. The insurer has to choose the beneficiary whom they can trust.
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Making the premium payment
After reviewing the quote the individual has to pay the premium amount. The insurance company provides you with the policy document.
What is Term Insurance Eligibility Criteria?
Let's take a look at the eligibility criteria required to buy a term plan in India:
| Parameters |
Minimum |
Maximum |
| Eligibility Age |
18 years |
65 years |
| Policy Tenure |
5 years |
99 minus (entry age) years |
| Life Cover |
Rs. 20 lacs |
No upper limit |
| PPT (Premium Payout Term) |
Regular Pay, Single Pay and Limited Pay |
| Death Benefit Payout |
Monthly, Half-yearly, Quarterly and Annually |
Types Of Term Insurance
Term insurance provides a range of options to accommodate various needs and preferences. The following are examples of typical term insurance policies:
-
Level Term Insurance
With this kind of policy, the sum assured stays the same throughout the policy. Additionally, the premium amount stays constant, making it simpler to plan your finances. An individual can choose the policy tenure as per their requirements.
-
Yearly Renewable Term Insurance
Picture it like a yearly subscription but for insurance. You can renew it without having to undergo a medical exam for the term, and it covers you for one year at a time. However, the
fact remains that your premium will increase each year you renew. Therefore, even though your initial premiums will be slightly lower than those of a level-term policy, your premiums will increase for a full 10, 20, or
30-year term.
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Term Return of Premium Insurance
There is a small twist in this one. You receive all or some of the premiums you pay if you live to the end of the term. The catch is that your premiums for this kind of policy could be 2-4 times more expensive than those for a level-term policy. Additionally, you might only receive a portion of your premiums back or, in the worst-case scenario, nothing if your financial situation changes and you let the policy lapse. In case the policyholder dies during the policy tenure, the death benefit will be paid to their beneficiary.
-
Guaranteed Issue Term Insurance
This one is a little simpler because a medical examination is unnecessary. If they ask any questions about health at all, they are only basic. However, if the insurance company believes
that you are a risky prospect with health problems then it may charge you with higher premiums. Also, there might be a condition to not pay the full death benefit for the first few years.
-
Convertible Term Insurance
This kind of policy offers the option to change from term insurance to permanent life insurance, like whole life or endowment insurance, within a predetermined time frame without the need of
a medical exam.
-
Zero Cost Term Insurance
Zero-cost term plans combine the benefits of traditional term insurance with the option of a premium refund. Simply
put, if a policyholder cancels their term life insurance plan within the policy's term, they are eligible to get a refund of the premiums they have already paid up to that point.
Who should buy Term Insurance plans?
Term insurance plans are popular among policy buyers because you can get cheaper coverage for a specified term. It is a pocket-friendly way to get higher life cover, whether you're a businessperson or a salaried employee. It works
as a protection net against the uncertainties of life at any age.
Whether you're in your 20s, 30s, 40s, or even 50s, you can avail of a term insurance plan and get adequate coverage to fulfill future goals and financial protection of your family in your absence. However, it is advisable to buy a term plan at an early stage of life because you'll get cheaper premiums and coverage for a longer duration. Moreover, policyholders also get tax benefits under the Income Tax Act of 1961.
Key Features of Term Insurance Plans
-
Larger life cover
Unlike life insurance, term insurance plans are typically affordable so that an individual can opt for a wide life cover for the same premium as compared to other life insurance policies. For instance,
a 40-year-old can opt for a term insurance policy with a life cover of Rs. 2 crores for a 30-year term by paying a lesser premium.
-
Optional Riders
The insured person can modify their base cover by attaching an optional rider to their term plan. There are several riders available such as critical illness, death benefit rider, terminal illness rider,
waiver of premium, etc.
When you opt for a critical or terminal illness rider, you're entitled to claim a death benefit on being diagnosed with the critical or terminal illness while you're still alive. However, you can
choose the riders based on your specific needs to make the life cover more suitable.
-
Tax Benefits
With a term insurance plan, you can avail of a few tax benefits under different sections
- Under Section 10 (10D) of the Income Tax Act: policyholders can claim a tax deduction on death and maturity benefits up to Rs. 2.5 lacs.
- Under Section 80C of the Income Tax Act: you can claim a tax exemption of up to Rs. 1.5 lacs for the premiums paid towards the term plan.
- Under Section 80D of the Income Tax Act: an insured person can claim a tax deduction of up to Rs. 75,000. Still, please note that it is only applicable to health riders added on term insurance like critical
or terminal illness riders.
-
Multiple Premium Payout Options
When you buy a term insurance plan, you've to pay a fixed premium amount to the insurer to keep your plan active. It is up to you to choose which type of premium payment term would be best
for you, such as monthly, semi-quarterly, quarterly, or annual payouts, at your convenience.
-
Premium waiver
To put it simply, waiver of premium that benefits means any outstanding premiums are waived off in the event of some specific circumstances when policyholders are not able to pay premiums.
For instance,
- Bhanu bought a term plan with a waiver of the premium option.
- After a few years, he met with an accident and became permanently disabled.
- In this case, he can use waiver of premium options and waiver off his remaining premium and keep their plan active.
Conclusion
Term insurance is like having a partner on which you can depend financially, which will provide financial security to your loved ones in your absence. You can choose a term insurance plan wisely if you understand how does term insurance works, satisfy its
requirements, and research the various types of term insurance offered. It is essential to do a little bit of researching and selecting a policy
that fits your needs and situation perfectly.Therefore, buy term insurance timely and affordably to protect the future of your loved ones. Do spend some time learning about what term insurance is and how it works, determining whether
you meet its requirements, and analyzing your options wisely. In this way, you'll be prepared to make a decision that truly has your family's interests at heart.
How Does Term Insurance Works? : FAQ's
1. What is tеrm insurancе?
Tеrm insurancе is a type of lifе insurancе that providеs covеragе for a specific pеriod, known as thе tеrm, typically ranging from 10 to 30 yеars.
2. How doеs tеrm lifе insurancе work?
Policyholdеrs pay rеgular prеmiums to thе insurancе company for thе tеrm. If thе policyholdеr passеs away during this pеriod, a dеath bеnеfit is paid to thе bеnеficiariеs. Thеrе is no payout if thе policyholdеr outlivеs
thе tеrm.
3. What factors affect thе prеmium amount for tеrm insurancе?
Prеmiums arе influеncеd by factors such as thе policyholdеr's agе, hеalth, and lifе еxpеctancy. Somе policiеs may rеquirе a mеdical еxamination.
4. What is thе purposе of thе dеath bеnеfit in tеrm insurancе?
Thе dеath bеnеfit providеs financial sеcurity to thе policyholdеr's bеnеficiariеs, who can usе it to covеr dеbts, еxpеnsеs, еducation costs, or maintain thеir quality of lifе.
5. Is thеrе any covеragе aftеr thе tеrm еxpirеs?
No, thеrе is no covеragе or payout if thе policyholdеr passеs away aftеr thе tеrm еxpirеs. Rеnеwal options arе availablе but may comе with highеr prеmiums duе to aging.
6. What arе thе еligibility criteria for purchasing tеrm insurancе?
Eligibility criteria include agе, hеalth, policy tеrm, incomе, sum assurеd, and prеmium paymеnt options. Thеsе criteria can vary among insurancе providеrs.
7. What arе thе diffеrеnt typеs of tеrm insurancе policiеs?
Thеrе arе various typеs of tеrm insurancе, including Lеvеl Tеrm, Yеarly Rеnеwablе Tеrm, Tеrm Rеturn of Prеmium, Guarantееd Issuе Tеrm, Convеrtiblе Tеrm, and Zеro Cost Tеrm insurancе.
Term Insurance Companies
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