Term Insurance: Key features

Insurance essentially provides a cushion against uncertainties which life is most associated with.

Term insurance is the simplest form of insurance which provides maximum coverage at a reasonable cost. Apart from the financial security it provides, it is essential if you have any loans or liabilities, outstanding financial commitments etc. In fact, a term insurance cover should be a priority as the cost of children’s education is exorbitant and even the routine monthly expenses are on the rise due to inflation. Thus to tide over all such eventualities, it makes sense for a person to take an appropriate term insurance cover.

Term insurance has certain inherent features which makes it an apt and powerful financial planning product.

1 Low cost             Term insurance is the most affordable form of insurance. This is because it is a win-win scenario for both the parties.

  1. For the customer – the policyholder is getting a cover for the said amount (sum assured) and the said tenure (policy term) on the occurrence of the event only. There is no payout at maturity and thus no savings or investment component is involved.
  2. For the Insurance provider – the insurance premium includes only the mortality charges and the nominal administration cost incurred towards policy issuance and maintenance.

2 Ease of buying – a term insurance plan is not a complicated product as is the case with some products like ULIPs, endowment plans etc. It is a cover which is based on your financial goals keeping in view your life stage, financial liabilities, etc. The right amount of cover can be calculated using a financial calculator, which is easily available online.

It can be bought in two ways:

Online    buying a term insurance plan is as easy as online shopping. For the customer, there is no hassle of filling up a physical form and providing copies of documents. The application is processed within minutes and in front of the buyer.

It is cheaper because the insurance company does not have to pay to an intermediary. It passes this cost saving to the customer. In most cases, online plans are cheaper than the offline plans by 5%-25%.

Also, it provides an option to the customer to choose and compare from 24 Insurance companies (LIC is government owned, rest are private companies) operational in India.

Offline    it is the traditional option of buying term insurance plan through an agent or any other channel partner/intermediary

3 Income Tax deductions   under the current tax regulations of the Income Tax Act 1961, three types of benefits are available:

1 Premiums paid under the policy are tax free under section 80 (C)

2 In case of critical illness rider option, an additional tax benefit under sec 80 (D) is available

3 Any claim amount received is tax free under Section 10 (10D)

Tax laws are subject to change from time to time. For details and help, please refer to your tax consultant

4 Payout options                 Primarily, term insurance policies provide for a lump sum payout to the nominee in case of death of the insured. However, apart from this option, there is another option available, known as staggered payout option. This is suitable for people who are not financially savvy and where the family would not be in a position to manage a huge, one time payout efficiently. Thus the insured in such cases, can opt for a certain amount to be paid as lump sum and rest of the amount to be paid at a regular frequency.

So, for a person who has just started working and is unmarried can have the option of taking a term insurance plan with a onetime lump sum payout. On the other hand, a person who has school going children can go for a term insurance plan with a lump sum payout in addition to a monthly income option.

5 Add on riders                                    Term insurance comes with additional option of riders like critical illness, permanent and total disability benefit, accidental death benefit, waiver of premium rider etc. These riders can be added to a term insurance plan for a comprehensive coverage at a reasonable cost. This also provides the policyholder the option for customization, as per his needs.

6 Flexible payment options               there is a greater flexibility in terms of premium payment. It can be monthly, quarterly, semi-annual or annual. Other options like single pay and limited pay (premiums to be paid for a limited period but coverage continues for the entire tenure) plans are also available. Thus flexible payment options help fit in all kinds of budgets and aspirations.

7 Rebate                for certain categories like non smokers and women, the insurance companies provide for discounted premium. This is because for the insurer, these are considered as “standard lives” in insurance parlance. This means that there is no specific adverse risk involved with people who do not smoke and with women.

8 Changes as per life stage                                many insurance companies allow the policyholder to increase or decrease the insurance cover as per the life stage. So, the needs of a person who is single and has just started working would be different at that stage when he is taking a term insurance plan. The same person, after getting married would have different financial goals and liabilities. Similarly, after having kids and after the kids start going to school, the goals would keep on changing as per different life stages of this person. This feature enables the policyholder to customize the cover keeping in mind all the future needs.

9 Tenure and entry age      the minimum entry age for most term insurance plans is 18 years. The tenure is a factor of the policyholder’s outstanding liabilities, expected retirement age and life goals. However, most of the insurance companies give an option of a minimum of 5 years and a maximum of 40 years of tenure. Though, this may vary for different insurance companies.

It is quite beneficial to go through the features of a term insurance plan. After a person has taken into account all the financial requirements and the budget, it is imperative to calculate a coverage amount (sum assured) that is adequate.

In the quest for attaining financial security, starting early is the key – a term insurance cover is the perfect way to start and definitely a step in the right direction.

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