'Term Life Insurance Policy: Features, Benefits And How It Works'
Term insurance provides life coverage for a specified period and can offer financial protection to dependents if the policyholder dies during the policy tenure. This guide explains how term plans work, premium factors, coverage requirements, death benefits, riders, return-of-premium options and key considerations when choosing a policy.
Term insurance can provide financial protection to a family through a death benefit during the policyholder’s chosen coverage period | Representational Image
A Term insurance plan is a type of life Insurance Policy that provides life coverage, protecting the family of the policyholder for a specified period. In the uncertain event of the policyholder’s sudden demise, the family members will receive the death benefit from the insurance company, subject to applicable terms and conditions. This plan generally offers life coverage at a comparatively affordable premium in comparison to other options available. The premium may differ depending on certain factors, which include the age of the policyholder, lifestyle, policy tenure, and coverage amount.
How Does Term Life Insurance Work?
A term plan offers life coverage in exchange for the premium amount paid for a specified tenure. The policyholder chooses the coverage amount and policy tenure depending on their financial needs. The working of a term plan can be understood through the following steps:
● Choose the Coverage Amount and Policy Tenure
The policyholder has to choose the sum assured required and the desired policy tenure depending on their financial needs, income, liabilities, and future financial obligations.
● Pay the Premium
The policyholder will then make premium payments according to the payment frequency chosen, i.e. monthly, quarterly, semi-annually, or annually.
● Receive Life Coverage
The policyholder will get the life coverage once the policy is active, remaining covered for the chosen policy tenure, subject to the applicable terms and conditions.
● Death Benefit to the Nominee
In case the policyholder dies during the policy tenure, the insurance company will pay the applicable death benefit to the nominee, subject to applicable terms and conditions. This benefit can help the family meet their future financial obligations and expenses.
● Policy Maturity
If the policyholder survives the policy tenure, there is no provision for a maturity benefit in a regular term plan. But there are some term plans that offer a return of premium option, where the premium amount is returned in such cases.
Key Benefits of a Term Plan
A Term Life Insurance can protect the policyholder’s family members and may include additional features, subject to the terms and conditions of the plan. Some of the benefits are:
● Financial Security for Dependents
A term plan provides financial security to family members in case of the sudden demise of the policyholder during the policy tenure.
● Affordable Premiums
A term plan offers financial protection at an affordable premium. The premium may vary depending on certain factors, such as the policyholder’s health, age, lifestyle, tenure, and coverage amount. A term insurance calculator can also be used to ascertain the estimated premium cost based on the information provided.
● Flexible Death Benefit Payout Options
There are different options provided by the insurers for death benefit, depending on the policy terms and conditions. The benefit can be received by the nominees either in a lump sum or in different available options that can help the family bear routine expenses or any outstanding financial liabilities.
● Additional Coverage Through Riders
Policyholders can enhance their coverage amount at some additional cost by opting for suitable riders, subject to applicable terms and conditions. These riders include critical illness, accidental death, waiver of premium, permanent disability riders, etc.
These riders are meant to offer additional financial assistance depending on the occurrence of a specified event.
● Return of Premium Option
Some of the term plans also offer a Return of Premium option, where the premium paid may be returned in case the policyholder survives the entire policy tenure, subject to applicable terms and conditions. These plans carry a high premium cost in comparison to a regular term plan.
● Tax Benefits
Eligible premium paid towards the term plan may qualify for a tax deduction on the premium amount paid, maximum up to INR 1.5 lakhs under section 80C of the Income Tax Act, 1961, subject to applicable terms and conditions. Additionally, death benefits received are eligible for exemptions under section 10(10D) of the Income Tax Act, 1961, subject to applicable income tax provisions.
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Factors Influencing Term Insurance Cover Amount
Provided below are the factors influencing the term insurance coverage amount:
● Number and Age of Dependents
The number and age of dependents can affect the coverage amount needed. Individuals with more dependents may need to consider a higher level of financial protection.
● Policy Tenure
It is the period for which the policyholder remains covered under the term plan. The appropriate tenure needed will depend on certain factors, such as age, financial obligations, and dependents' ages.
● Monthly Expenses
The monthly expenditure should be considered while determining the financial protection needed. Expenses to be incurred, like children's fees, medical expenditures, groceries, travelling costs, utility bills, etc., should be analysed to ascertain the family’s future financial requirements.
● Inflation Factor
The impact of inflation may be considered while determining the coverage while buying the term plan. Any increase in the sum assured would depend on the features and terms of the plan.
Conclusion
A Term insurance plan offers financial protection to the policyholder’s family members and can help them fulfil their financial goals in the policyholder’s absence. Understanding the workings, features, and benefits of term insurance plans can help individuals make a well-informed decision. Choosing an appropriate coverage amount and policy tenure can help ensure that the policy aligns with the family’s financial needs and long-term goals.
FAQs
1. When should a term plan be opted for?
An individual should opt for a term plan if:
● Their priority is to provide financial security to family members in their absence.
● They want to get high coverage of life insurance protection at a reduced cost.
● They primarily offer life protection and don’t need a maturity benefit in case of a regular term plan.
2. Can the coverage of Term Insurance be increased?
The chances of increasing the term plan coverage depend on the policy and insurer. Depending on the options available, the coverage amount can be increased with the help of an increasing term plan, eligible riders, or buying a new plan with a high sum assured.
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