7 minutes read
- What is term insurance and how does it work?
- Types of term insurance
- Who should buy the term insurance?
- How much minimum life cover one should take?
- How to buy the term insurance
- Advantages of term insurance
- Disadvantages of term insurance
- Taxation on term insurance
- Conclusion
- FAQs: Explain the Term Insurance
The Term insurance is a most common type of life insurance and is considered best from the point of view of financially literate people as it offers a big amount of life cover against paying a small amount of premium. You will get the best knowledge related to the term life insurance below, read till the end.
What is term insurance and how does it work?
Term insurance is the most popular life insurance policy where a policyholder has to pay a fixed amount of premium regularly to the insurance company for a fixed period as mentioned in the policy against for which insurance company promises to pay the policy’s sum assured to the nominee or legal heirs of a policyholder upon his death within the specified term period of the policy, But in case the policyholder outlives the term period of the policy then nothing will be paid neither him nor his family and the policy gets terminated.
But, if you have added the Return of Premium (ROP) Rider to your policy at the time of purchasing it and you outlive the term period of the policy then the insurance company will return you the whole amount of premium you have paid till maturity.
The sum assured/death benefit paid by the insurance company to the policyholder’s family protects them from suffering financially after the death of a policyholder.
Note: The minimum age for buying a term insurance plan in India is 18 years whereas the maximum age is 65 years.
Example: (Basic Term Plan)
Mr. Rohan’s age is 20 years and he purchased a Pnb metlife term insurance plan with a life cover of Rs.1 Cr, the policy will cover him till the age of 60 years against which he has to pay a monthly premium of Rs.783 to the insurance company throughout the coverage period.
So, after buying the term insurance if he died before the age of 60 years (say he died at 26) then his nominee will receive the sum assured of his policy which is Rs.1 Cr upon his death and the policy will get terminated.
But, if Mr. Rohan outlives the term period and dies at the age of 61 then nothing will be paid neither to him nor his nominee.
Types of term insurance
1). Level / Basic term plan: It is the basic term plan where a policyholder pays a fixed amount of premium to the insurance company and in return insurance company promises to pay the amount of policy sum assured to the nominee of the policyholder only if the policyholder dies within the specified term period of the policy.
2). Increasing term plan: It is a type of term plan where the amount of sum assured of the policy increases every year by a fixed percentage, the amount of premium may or not change throughout the term period as decided at the time of purchasing the policy.
3). Decreasing term plan: It is the cheapest term plan as the amount of sum assured tends to decrease every year by a fixed percentage and becomes zero at the time of maturity, the amount of premium costs lower as compared to the basic term plan, people usually purchase decreasing term plan to safeguard their family from any active financial liabilities as the amount can be used to set off their liabilities in case a policyholder dies before the repayment of that liability.
4). Convertible term plan: This is a type of term plan which can be easily converted into a whole life insurance policy, without even going for a health test.
5). Return of premium plan: It is a type of term plan where the insurance company refunds the total premium paid by the policyholder in case the policyholder outlives the term period of the policy.
6). Term plan with riders: It is a type of term plan with already added riders, riders are the add-ons that provide extra protection and benefits to the policyholder, some of the riders are ex-terminal illness rider, critical illness rider, waiver of premium rider, etc.
Who should buy the term insurance?
A term insurance plan provides financial support to the family members of a policyholder in case the policyholder dies unfortunately within the term period of the policy.
You should go for the Term insurance plan if you meet any of the conditions:
- If you are the only bread-earning member of your family or if your contribution is highest in your family.
- If you are a salaried person and not have enough financial backup.
- If someone is dependent on you for their bread.
- If you belong to the middle class and don’t have enough assets or savings.
- If you have any existing personal loan or other debts, because life is unpredictable and if you die before setting off your loan then it will create a financial burden on your family but if you have a term insurance plan then they can set off your loan with the help of sum assured received by the insurance company upon your death.
How much minimum life cover one should take?
Different people have different living standards and expenses, so the life cover requirements of different individuals will be different, let’s take the example of Mr. Anurag
Anurag is a chartered accountant whose age is 32 years and he is the only bread earner for his family and his family includes his mother, father, wife, son, and daughter.
- Based on his current living standards his family expenses are 50,000 per month which include groceries, fuel, clothing and accessories, children’s school fees and transportation, electricity bill, and other basic requirements.
- He has an outstanding home loan of Rs. 40 L and a car loan of Rs. 8 L (till date).
- Also, he invests Rs.10,000 in mutual funds to build a corpus for his children’s higher education and marriage.
- He purchased a group health insurance policy for himself as well as his family members a few days back for which he pays Rs.2,000 premium (per month).
His son is 10 years old and his daughter is 7 years old, assuming that his children will start earning from the age of 25 years, which means 25-10 = 15, so he should take a minimum of 15x life cover of his total expenses.
Basic inescapable expenses | 50,000 (p.m) |
Ongoing liabilities (home loan and car loan) | 48 L |
Investment in Mutual funds | 10,000 (p.m) |
Premium for health insurance policy | 2000 (p.m) |
50,000 + 10,000 + 2,000 =62,000
62,000*12= 7,44,000
Mr. Anurag requires 15x life cover, so 7,44,000*15= 1.12 crore (round off)
Ongoing liabilities 48L
So, the total life cover requirement of Mr. Anurag will be 1.60 crores to sustain his family’s living standard if he dies today.
Note: we have not considered inflation because upon the death of one member expenses will also decrease.
How to buy the term insurance
You can buy the Term insurance policy either online or offline.
To buy it offline, you have to go to the branch of life insurance providing company that you find suitable
Some of the trusted life insurance companies are LIC, Bajaj Allianz, Max Life Insurance company, Aditya Birla Sun Life insurance, Kotak Life insurance, Tata AIA, etc.
Go there > Get details of life insurance plans available > Compare and select > Documentation and other formalities > Payment
Nowadays people prefer to buy a life insurance policy online as it saves time as well as money because it doesn’t include the agent’s commission.
To buy it online, follow these steps: (Policybazaar)
- Go to the website of Policybazaar
- Click on the option of Term insurance
- Fill up the required basic information
- Enter Policy term period and life cover
- Schedule Premium payout, you can pay premium in lump-sum, monthly, quarterly, half-yearly, or annually
- Choose Riders for more protection, if you need
- Complete your KYC
- Fill in your medical details
- Make the payment online
Advantages of term insurance
The advantages of the term insurance policy are:
1). Term insurance offers a big amount of life cover at a very small premium, you can get a life cover of Rs. 50 lakhs at just Rs. 983 per month, considering the age as 20 years.
2). You can add Riders to your term insurance policy to get more protection and benefits.
Example: Waiver of premium rider – If a policyholder has added a waiver of premium rider then the insurance company will pay the upcoming premium on behalf of a policyholder if in case a policyholder is unable to pay the premium due to the loss of income, physical disability, critical illness, etc.
3). You can enjoy tax benefits on purchasing a term insurance plan under Section 80C and 10(10D).
Disadvantages of term insurance
The disadvantages of the term insurance plan are:
1). Term insurance policy offers no maturity benefits which means nothing will be paid to the policyholder or his nominee in case the policyholder outlives the term period of the basic term insurance policy.
2). The amount of premium rises as the age of a person rises, if you are purchasing a term insurance policy at the age of 20 then the premium paid by the person who has started the same at the age of 19 will be less for the entire term period.
3). You will not get any amount back if you want to surrender/cancel your term insurance policy.
Taxation on term insurance
The policyholder can enjoy tax benefits by purchasing a term insurance plan under Section 80C, 80D, and 10(10D)
1). Section 80C: Under section 80C the premium paid by the policyholder towards the term insurance plan will be exempted from any income tax up to Rs. 1.5 lakh per annum.
Example: Mr Ram pays the premium of rupees 70,000 per year towards his term insurance plan, then under section 80C Mr Ram need not to pay any income tax on 70,000 Rs but his remaining income will be taxed as per the tax bracket he falls.
2). Section 10(10D): Under section 10(10D), no income tax is to be paid on the amount of sum assured received by the nominee of the policyholder upon his death.
3). Section 80D: If you have added any health-related rider to your term insurance plan then you can get an extra deduction up to Rs.25,000 per year under Section 80D. Example of health-related rider is critical illness rider
Conclusion
In this article, we explained the term insurance plan, how it works, who should buy it, how much minimum coverage one should take, its advantages and disadvantages, and taxation. After reading the above content you can easily decide whether it will be the right choice for you to buy a term insurance plan or not, hope you like it.
If you want to read about the whole life insurance policy, then click here.
FAQs: Explain the Term Insurance
Q1: Who will get the sum assured if a policyholder and his nominee both die?
A1: In case the policyholder and his nominee both die then the legal heir of the policyholder will get the sum assured, a legal heir is a person who has a right to acquire the deceased person’s wealth based on a signed will, but in the absence of will personal sucession law will be applicable.
Q2: What is the minimum and the maximum age for buying a term insurance policy?
A2: The minimum age for buying a term insurance policy is 18 years whereas the maximum is 65 years.
Q3: Do I get some money back if I outlive the term period of the term insurance policy?
A3: No, you will not get a single penny back if you outlive the term period of the policy but if you have added the Return of Premium rider to your term plan then the amount of premium you have paid till maturity will be refunded to you.
Q4: What is the right age for buying a Term insurance plan?
A4: One should buy the term plan as early in life because the amount of premium rises as your age increases, the best age is 20s.
Q5: In which situation my family will not receive the sum assured of the term insurance policy?
A5: The following are the situations:
– death due to suicide within the first few years of buying the policy.
– death because of any pre-existing health issues which were not disclosed in the policy
– death due to involvement in illegal activities
– death because of dangerous activities
– death due to smoking and chewing tobacco which was not disclosed at the time of buying the policy.
Q6: Eplain the term insurance in simple language.
A6: Term insurance is the most popular type of life insurance policy where you can get a big amount of life cover at very low cost, if the policyholder dies during the term period of the policy then his nominee will get the amount of sum assured upon his death but in case the policyholder outlives the term period of the policy then nothing will be paid and the policy will end, but you can enhance your term insurance policy by adding the Riders.