Understand Concept of Term Insurance in its Simplified Form

A term life insurance policy gives only death compensation when there is sudden demise of the policy holder within the term period. It is a life insurance product that offers financial coverage to the policy holder for a specific time period. The policy might be terminated if the policy holder fails to pay his or her premium. This can be the best decision you can make while working as it lessens your worries. The death benefits are paid by the company to the beneficiary in case of death of the insured person.

Benefits of Term Insurance-

1.     It is Simple-

These plans are easy to understand in comparison to other insurance plans such as endowment policies which have risk factor along with savings. Plans which have risk cover and savings are known as cash value plans. It is not easy to divide the premium into risk cover and savings. Term insurance is simple as it pays the premium and gets the policy holder covered for the term decided.

2.   Competitive Price-

These polices can be easily compared on the basis of price as these policies are simple to understand and structurally similar. The life term policy market is growing rapidly, making the policy as a product. There are less of information problem to the buyers, thus making the market more price-competitive.

3.   Flexible-

Under this, if you stop paying the premium, the risk cover ceases and the policy ends. You will not get any money as there is no saving element in this policy.  Many term life insurance policies can be ‘renewed’ and ‘converted’.

Under renewable term, you can also move to another policy term at the end of first term policy without any medical exam. Whereas, in convertible term, your policy can be converted into an endowment policy for the same sum assured with an increase in premium during the policy term.

4.   Benefits in Tax-

In term insurance plan, the premium paid is very less and it is also eligible for tax benefits under section 80C of the Income Tax Act. You can also invest the difference in premium between term and endowment insurance in some other tax saving schemes like PPF, ELSS which offer front and rear end tax breaks.

5.    Low Premiums-

The premium rate for term insurance is lower than any other insurance plan. For example, a 30 year old person can buy a level term insurance policy of 20 years for Rs 10 lakh sum assured for about Rs. 3000 annual premium.

Limitations of Term Insurance Plan-

·         With the growing age, the premium for term insurance increases and thus insurance needs at higher ages cannot be met economically.

·        At older age, it becomes difficult to buy term insurance as most companies do not offer it beyond the age of 65 or 70.

·        If you wish to save money for a specific need such as retirement, child, marriage etc. then term insurance is not for you.

·         It will not provide for any income or capital needs of your family when you are alive.

·        This policy does not provide any loan or surrender values.

·        These plans are without profit, thus they do not provide any hedge against inflation. 

·        New term insurance or renewable of existing term policy will not be available if you become uninsurable at any point due to any reason.

·         This policy does not mean wealth creation.

Uses of Term Insurance-

This policy is appropriate for the following situations-

·        If you have strict budget then term insurance is the best option for you in comparison to cash value insurance.

·       This is suitable for a person with low income but needs a large cover to protect his family financially in case of demise of the policy holder. This also suits to the person who is the sole provider to the family with moderate income.

·        People with new career or business venture can save the cost by opting for term insurance policy as this way they can use their balance income to develop their business or career.

·        This is suitable for those who have taken large loan or for people who have invested in new business by borrowing at high interest rates or by mortgaging their property.

·        This can be used to cover the risk of loss in business due to sudden death of key man by cash strapped enterprises as key man insurance at low cost.

·        It is an inexpensive method that provides financial security to your domestic servants.

Conclusion-

Term insurance provides financial coverage to the policy holder for a specific time period. And in case of demise of policy holder the death benefits are provided to the beneficiaries. Many insurance companies provide cheap term insurance, but rather than going for low cost, it is better that you understand and the best term insurance plans in the market and make a wise decision.