As the name says, term insurance is the insurance plan that provides protection for a particular term. It is the simplest kind of life insurance in the market as it does not mix investment with the insurance.
The insured chooses a time period say, 5, 10, 15, 20 or 25 years for which he wants to avail the insurance. During this period his life is covered and insured. If anything unfortunate happens to him, his nominee gets the sum insured. Sum insured is chosen by the insured at the time of signing the policy documents. The insurance company charges premium as per the sum insured chosen, age, health status, hobbies, city he lives in, occupation and the other kinds of risks the insured may have to face in case of any uncertainty.
However, in case the insured survives the term policy period he is not eligible to get anything in return. For this reason term insurance is the cheapest life insurance product in the market. Nonetheless, term insurance plans with return-of-premium option have also found a place in the market. Under this plan the insured gets the premium amount back but then the premium charged is higher as compared to that of the basic term plan.
Term insurance comes in five variants, which are listed as below:
Level term insurance The level of the coverage for the entire period for which the term insurance is bought remains same. Along with the coverage the premium amount also remains the same.
Return-of-premium term insurance Term insurance generally comes with no benefits except from life cover, however when insured chooses return-of-premium term insurance he gets his premium back at the end of the policy term, which often is also known as maturity benefit. The premium charged in this kind of plan is higher than the premium of term insurance plan with no return-of-premium option.
Increasing term insurance In this term plan, the level of coverage keeps on increasing with the age of the insured but the premium remains same. The increasing term is preferred by those who consider inflation rate. Also those who think their requirement will increase with their age and their sum insured should increase with the time, buy increasing term insurance. However, the higher premium is the point of consideration.
Decreasing term insurance Under this plan the coverage keeps decreasing with the increasing age of the insured. The insured assumes that his responsibility will decrease with his age and so should happen with his chosen sum insured.
Annual renewable term insurance The insured can renew his coverage at the end of the each year. This kind of plan is taken by those who think they should review their requirements annually. Also they do not want to pay premium unnecessarily for the coverage that they do not require. The premium rate is lower at the beginning and increases with the age of the insured.
• Term insurance assures peace of mind to the insured that in case something uncertain happens to him, financial assistance will be provided to his family.
• Nominee gets the sum insured amount in case of unfortunate demise of the insured.
• The insured can choose the period for which he wants protection.
• Term insurance is the easiest plan to understand as there is no investment factor in it.
• It is the cheapest life insurance available in the market.
• Tax exemptions can be availed for the amount that is paid as premium towards term insurance.
• The insured has the freedom to choose annual renewable plan, increasing term plan, decreasing term plan, level term plan or return-of-premium term plan.
• Term insurance comes with the option of converting it into whole life insurance plan.
• The insured can avail the riders like accidental death benefit and critical illness benefit along with the base policy at a nominal increase in premium.
• Term insurance should be bought in the younger years of life.
• The number of years you choose for the coverage should be equal to number of retirement age or the age you will stop working, minus, your present age.
• Sum insured amount should be determined by adding up all the routine expenditure of the family i.e. grocery bills, educational costs etc; outstanding mortgage bills, taxes and other liabilities, funeral/burial expenses as well as the capital amount the family would need to start afresh to start earning or to earn interest on it.
• Compare the price and features of online term insurance plans and term plans from regular sources before taking any decision.
• Understand each rider and choose carefully. Pick the ones that suit your requirement.
However there is no strict mathematical formula to calculate cover as it varies from person to perso based on his liabilities, responsibilities, number of dependants and life style but Basic rule is that your cover should be enough payouts of all loans and 10 years of your family current expenses. For example, if your family is dependent on you for 25000 per month and you have home loan of 30 lacs, you should take cover of 30 lacs (loan) + 25000*12*10=30 lacs. Hence, buy a term plan of 60 lacs which will cover your loans and expenses of the family.
Right Now. The earlier you begin, the cheaper it costs but there is nothing called wrong time to safeguard your loved ones. Should I buy the cheapest term plan available? What is Claim Settlement ratio? The ultimate success of Term Plan is easy claim settlement. Which means Claim Settlement Ratio (ratio of claims paid to number of claims that came) and period required to settle the claims should be more important criteria than saving few hundred on premium.
You get many benefits at one go when you buy term plan. It is the cheapest of all. It is the simplest plan and not at all complicated to understand. You get risk coverage for the period you choose. Therefore you can avail financial protection till the time when you think your family depends on you.
The basic purpose of buying insurance is to get risk coverage. Term plan does exactly that. It provides pure and only protection. You should buy term plan for the period when you are earning. Therefore, buy the term plan for the duration you will keep earning. If you are 35 and planning to retire by 60, you have 25 years more to work. Or simply deduct 35 out of 60. You will get the number of years you should buy term plan for.
Basically term plan does not provide any maturity benefit. The nominee gets the death benefit in case the insured dies during the term of the policy. However, there is another category of term plan in which the insured get the premium back when the policy gets matured.
Term plan provides pure insurance protection. It is not linked with any kind of investment as it is with other kinds of insurance plans. Also, term plan provides protection for a specific duration. If the policyholder outlives this duration, the insurer is not liable to pay any benefit. Therefore, term plan comes at a cheap price.