What is Term Insurance and Who Should Buy It?

People generally plan their lives with hope and aspiration, but what if life does not unfold as envisioned? That's where term insurance comes into play. It's a simple and inexpensive way to help ensure that your family remains financially secure after you're gone.

As responsibilities increase and unanticipated events arise, having a safety net is no longer an option but a necessity. In this blog, we will explain what term insurance is and who should consider it as part of their plans.

What is Term Insurance?

Term insurance plan is a simple type of life insurance product that provides financial security over a specified period, also known as your 'term'. In the unfortunate event of the policyholder's passing during the term, the insurance company pays the death benefit to the beneficiaries chosen by the policyholder.

This type of insurance does not accumulate cash value in the same way that investment or whole-life plans do, as it is primarily intended to provide life coverage. Term insurance is the most affordable form of life insurance, allowing individuals to obtain high coverage amounts at a low premium cost.

Key Features of a Term Insurance Plan

The simplicity, affordability, and strong protection offered by term insurance make it the most popular type of life insurance. The plans work well for straightforward, risk-oriented situations, but they also provide options that allow for some customisation. Here's a breakdown of its key features:

1. Cost: The low premium rates for term insurance provide large amounts of life coverage at relatively low prices, making it affordable for most people and allowing them to protect their families without incurring significant costs.
2. Transparent and straightforward Structure: The insurance plan structure is easy to understand, with defined coverage and benefits, and outlined terms about the premiums you will pay. There are no hidden charges.
3. Flexible Policy Term: You can choose a policy for 5 to 30 years, depending on the needs you have and the financial needs you want to cover.
4. Various Premium Payment Frequencies: Insurance companies typically market term policies with monthly (most common), annual, semi-annual, or quarterly premiums. This allows some flexibility for your budget.
5. Choice of Payout Options: Beneficiaries can receive a lump sum payout, a periodical payout, or both for the death benefit, depending on each family's needs or preferences.
6. Ability to Add Riders: Insurance companies now offer riders as optional add-ons (e.g., critical illness, accidental death riders) to provide more comprehensive insurance coverage.

How Term Insurance Works?

Term insurance is a type of life insurance plan that operates on a pure protection basis. The policyholder selects the coverage amount and term of the policy, and pays monthly premiums over the term. If the insured dies during the term, the insurer pays the sum assured to the beneficiaries chosen by the policyholder.

Typically, if the insured survives the term, no maturity or survival benefit is paid (unless the premium return option is selected). The premiums are typically based on calculations related to the applicant's health, age, and lifestyle.

If the policy lapses or the term ends due to missed premiums or a lack of a claim, coverage will end, and no return will be made. Some plans will allow for the policy to be renewed or transformed into another policy at the end of the term (if so, the premiums may increase).

What are the Benefits of Term Insurance?

Term insurance offers various benefits that can help strike a balance between financial security and comfort. Key benefits include:

1. Financial Protection for Loved Ones: If the policyholder dies, the beneficiaries receive the benefit from the term insurance policy, which can help cover family expenses, pay off debts, and achieve primary life goals, such as saving for children's education or marriage.
2. Economical Premiums: Term insurance plans are less expensive than others and provide such extensive coverage at a low premium. These plans have prices that suit individuals at any point in their lives.
3. Comprehensive Protection with Riders: By adding optional riders to the base cover, you can customise and expand the policy to include features such as critical illness or accidental death coverage.
4. Flexible Cover Limits: You can opt to pre-arrange payment claims to at least ensure your financial preference suits your beneficiaries by getting paid a lump sum, monthly payments, or a combination of both.
5. Tax Benefits: As per the current income tax scenario, premiums paid towards term insurance and the lump sum benefit paid to nominees are partially offset by the government in the form of tax reduction or benefit, thereby increasing their savings.
6. Flexibility for Life Events: Many plans offer the opportunity further to increase the coverage amount as life events progress, and as responsibilities grow, you can do this to guarantee that the protection remains enough, as your financial obligations grow.

1. Peace of Mind: Knowing that an adequate financial buffer is available for one's family would allow policyholders to concentrate on their current obligations without worrying about their dependents' future.

Who Should Consider Buying Term Insurance?

Term insurance is best suited for individuals with financial dependents or significant debts. The following are some common examples of people who would benefit from term insurance:

1. Sole Breadwinners: The primary income generator in a family has the task of ensuring their dependents' financial future is defined in the event of their death. Term insurance will account for replacing the income if an income generator were to pass away.

1. Young Professionals and Entrepreneurs: Having a term insurance policy in place at a young age allows you to receive tremendous coverage at a relatively low premium. It can also serve as the foundation of a sound financial plan for the right individual just starting their career or business.

1. Parents with Young Children: Term insurance will provide peace of mind and protect their children's goals and dreams. This policy will provide resources to fulfil their obligations with respect to the education, extracurricular activities, and upbringing of their children, even without them being present.

1. Homeowners or Those With Large Loans: Policyholders carrying substantial debt, such as personal, car, or home loans, should look to secure term insurance to wipe out outstanding debt in case of their death, and not to add any additional burden to their family.

.

1. Individuals Planning for Marriage or Future Responsibilities: Anyone who is transitioning to a new stage of life, such as getting married, should also consider term insurance as a way to cover the additional commitments and joint financial aspirations.

Common Riders and Add-Ons Available for Term Insurance

Riders and add-ons are extra benefits or features that widen the benefits associated with a term insurance policy. These additions allow the insured to address unique risk scenarios and tailor their life cover to their precise needs. Key riders include:

Accidental Death Benefit rider

The accidental death benefit rider pays out some additional money, on top of the basic sum assured, if the insured dies as a result of an accident. This rider is essential for people who have a greater risk of physical injury by virtue of their work or modes of transport taken. The rider is often very inexpensive and can provide a significant increase in coverage in the event the insured dies in an accident.

Critical Illness Rider

A critical illness rider pays a lump sum upon the diagnosis of a fatal disease, such as cancer or heart disease. This cover is designed to assist the insured and their family with the sudden and unexpected expenses of healthcare and the financial impacts of not working during treatment and recovery. The insured can use the lump sum for their treatment, household expenses, or any urgent financial pressure.

Waiver of Premium Rider

This rider protects the continuity of the coverage in the event the policyholder suffers a permanent disability or a critical illness that prevents them from working or paying future premiums. If that occurs, it waives the future premiums, and the policy remains active, providing the coverage without the additional burden of out-of-pocket payments.

Permanent Disability Benefit

This rider provides a predetermined amount of money to help cover the loss of income and pay for rehabilitation costs if the policyholder suffers a permanent or partial disability as a result of an accident. This rider is crucial if your livelihood depends on your physical health.

Income Benefit Rider

The income benefit rider provides a consistent income for a specified period to supplement the policyholder's death benefit. Income and economic stability provided by the rider help the dependents of the policyholder transition into their new financial situation without having to endure immediate hardship.

Essential Factors to Consider When Choosing a Term Plan

When choosing the correct term insurance plan, it is best to assess various facets related to you and your policy to achieve comprehensive protection and longevity. Key factors include:

1. Amount of Coverage: Calculate the amount of coverage you need, taking into account your current lifestyle, dependents, financial obligations, and long-term goals. Ensure that your coverage is sufficient to protect you from inflation and changing responsibilities.

1. Policy Tenure: Select a policy tenure that will coincide with your significant financial commitments in life, such as retirement age, children's higher education requirements, or the period required for mortgage repayments.

1. Claim Settlement Ratio: It is best to choose insurers with a good claim settlement ratio because this factor reinforces credibility and the likelihood of your dependents being able to claim with confidence.

1. Affordability of Premiums: Choose the right coverage and premium schedule that best suits your budget. Premium extremes vary greatly depending on the product and coverage.

1. Add-on Riders: Review the resources for riders, then select the coverage you need to address your defined risks and needs. These coverages could include, but are not limited to, a critical illness rider, accidental death rider, or waiver of premium rider.

1. Exclusions and Policy Terms: It is imperative that you read and understand the exclusions, waiting periods, and paperwork required of you for your policy to prevent any disappointments while making a claim.

1. Insurer's Reputation and Service: Choose providers that have a good reputation, characterised by good customer service, easy onboarding, and transparently published policy terms and conditions to ensure a hassle-free experience.

A term insurance policy is more than just a policy; it's a promise to protect your family's financial future if an unexpected situation occurs. If you're starting a family, repaying a loan, or experiencing other uncertainties in life, a term insurance policy can be a cost-effective tool to protect you against tomorrow's risks.

It is a sound choice for financial planning, suitable for individuals with dependents and those with long-term financial obligations. The sooner you purchase a policy, the more protection your family will have. After all, financial security should be a certainty, not an option.