Insurance policies and plans are more than an investment for an individual. They are a symbol of assurance that their loved ones will be well taken care of in the unfortunate event of the individual’s death. Term insurance is a part of the insurance product offerings.
A Term Insurance plan is a pure insurance plan wherein the insured is covered for a particular number of years (as specified in the policy) called the “term”. In case of the death of the insured the beneficiary is paid out the death benefit by the insurance company.
A term insurance plan is plainly speaking a 100% insurance product with no investment component to it. Hence, these plans have lower premiums. They are affordable to all individuals hailing from any strata of the society.
Term insurance plans offer no survival or maturity benefit to the insured on expiry of the term. The aim of a term insurance is to cover the cost of living the insured person’s family in case of his unfortunate death. Hence, survival benefits are not paid out. Some insurance companies however offer to return the premiums paid by the insured at the end of the term. But such instances are rare and almost unheard of.
As an individual, who is looking out for his/her family’s welfare at all possible times, there are certain questions that one must ask before buying a term insurance plan.
- What should be the duration of my term insurance policy?
This is a tricky question and the answer will vary from person to person. The duration of your term insurance plan should depend upon your age, marital status, children’s age and the number of years you will continue to work (i.e “retirement age” – “current age”).
These factors play the biggest role in choosing the correct duration of the policy. Most insurance companies offer a minimum duration of 5 years/10 years up to a maximum of 35 years.
One more thing to note here is that even though term insurance plans come with the option of renewability at the end of the term, the premium will increase if one opts to renew the plan after the expiry of the first plan. Hence, ideally if it is possible, opt for a plan with a higher duration, so as to keep the amount of premium paid at a minimum.
- How much insurance cover do I need?
The objective of term insurance plans is to make sure the insured’s family can continue to lead a dignified life in the unfortunate event of the insured’s death. Thus, to determine the amount of insurance cover needed, one must determine the needs of their family. Consider the following points to guide you towards the right amount:
- Average monthly expenses of the family (groceries, electricity, phone bills, etc)
- Average expenses on children’s education (keep in mind these will increase every year as the children move to the next standard)
- Any long term EMIs that you are paying (home loans, other asset loans etc.)
- Inflation (yes! Please consider at least 5% of inflation per year)
Any other recurring expenses that may not be a part of this list, but do affect your family should be added too. This will lead you to a ballpark number, which will be the amount of insurance cover you need.
- What type of premium payments should I opt for?
Term insurance plans offer annual/half yearly/quarterly/monthly premium payment options. The amount of premium to be paid will depend upon the sum assured of the policy. Generally the annual premium payment option is the least expensive one, because you will be transferring the money to the insurance company at one go every year.
Hence, on comparison one may see that the premium amount for the same sum assured is different for different premium payment options. Based on your monthly income and expenses, check which premium payment option is ideal for you.
- Do I need additional riders in the term insurance plan?
Insurance companies offer additional riders to their plans. These riders cover critical illnesses or permanent disabilities that may occur during the term if the plan. In such cases, the company waives off future premiums but the plan continues to cover the insured. Thus, in case of the unfortunate event of the death of the insured, their family will get the death benefit.
A rider adds to the safety net of the individual from a financial perspective. But it also means that the insured will have to pay a higher premium to get these riders. Therefore, choose carefully whether or not a rider is necessary.
- What is the entry age for a term insurance policy?
Term insurance plans are a basic type of life insurance. The entry age for this type of plan is 18 years and maximum is 65 years. This makes them an ideal choice for many individuals. The closer you are to the entry age the lower is the premium amount to be paid by the insured.
- Do term insurance plans cover a sub-standard life?
At the outset let us define what a sub-standard life is, a sub-standard life is one which is deemed uninsurable due to a history of serious health ailments (heart disease, for example) or physical disabilities. Individuals with such conditions find it difficult to obtain an insurance policy. But there are certain insurance companies such as Max Life Insurance who are willing to provide a term insurance life plan even to such individuals at a higher premium charge.
- How do I want the insurance amount to be paid out?
In the occurrence of demise of the insured, the death benefit will be paid out to the nominee of the policy. Now, all insurance companies offer a variety of payout options under their term insurance plan.
- Option 1: Lump sum pay out – The assured sum will be given to the nominee at once.
- Option 2: Monthly income pay out – The sum assured will be paid to the nominee in the form of monthly installments to supplement their expenses over a longer period of time.
- Option 3: A combination of lump sum and monthly income – The nominee will be paid a partial lump sum amount in case of the death of the insured. The rest of the sum assured will be paid in monthly installments.
These are the broad pay out options under term insurance plans. Every insurance company has done further customization under this umbrella. Some companies offer increasing monthly income to support the growing expenses, while some companies offer varying ratios of lump sum and monthly installments.
- What is the ratio claim settlement of the insurance company?
Claim settlement ratio is defined as the total number of death claims approved by the insurance company, divided by the total number of death claims received by the insurance company.
The IRDA (Insurance Regulatory and Development Authority) measures the ratio claim settlement of all insurance companies every year (financial year). A higher claim settlement ratio is a positive indicator of the insurance company living up to its promises. Before finalizing on a policy, check the ratio claim settlement on the IRDA website to ensure that you are opting for a company that is reliable and credible.
- Does term insurance cover a smoker?
Yes, term insurance plans cover both smokers and non-smokers. Smokers have to pay a slightly higher premium amount than non-smokers. But they are not considered uninsurable and they are eligible for the same death benefit as a non-smoker.
- Can I surrender my term insurance plan in the middle of the term?
Yes, you can surrender the term insurance in the middle of the term. But it is advisable not to surrender the plan unless and until you have come to the conclusion that it is not possible for you make the remaining premium payments.
Term insurance plans only have death benefits outlined in them, hence, even on surrender of the policy, the individual will not receive any amount from the insurance company. Instead the insured will have to pay surrender charges to the company for early termination of the insurance policy. Thus, it is advisable to not surrender your term insurance policy.
- Do I get tax benefits on a term insurance policy?
A term insurance policy being a part of the insurance products, is eligible for deduction under section 80C of the Income Tax Act, 1961. The claim amount paid out by the insurance company to the nominee is exempt under Section 10 (10D) of the Income Tax Act, 1961.
All in all, a term insurance plan is a great way to secure the lives of our family members in the event of your death. It allows your family members to continue having the same lifestyle and dignity. It will give them the freedom to lead their lives with pride without having to worry about financial pressures.
Thanks to the world of internet, buying an insurance policy is no longer a cumbersome job that can only be done through agents and tons of paperwork. One can go online, get all the necessary details of various policies, compare them and buy the policy. All of this can be accomplished from the comfort your home, in a matter of minutes!