What Is Term Insurance? How Does It Work And Its Benefits

What Is Term Insurance?

Term life insurance is a basic life insurance plan that provides financial protection to your loved ones at an affordable premium. The policyholder pays a premium for a chosen term, and if the policyholder dies during that time, the nominee receives the sum assured. Term insurance policy does not offer any survival benefits. Still, many insurance companies now offer riders and add-ons for added benefits that the policyholder can purchase for a slight increase in the premium.

How Does Term Insurance Work?

The amount of coverage you need depends on your individual circumstances, such as your age, income, and dependents. Once you have chosen a term length and coverage amount, you will need to pay a premium each month or year. The term insurance premium depends on various factors, such as your age, location, sum assured, and policy term. If you fail to pay the premium, your policy will lapse.

In case of your demise during the policy term, the death benefit will be paid to your beneficiary/nominee. Beneficiary/Nominee can use this money to cover funeral expenses, pay off debts, or provide for your loved ones' financial needs, such as buying a house, children's higher education, spouse's medical treatments, children's marriage, etc.

Term insurance does not offer any investment features, so it is not a good option for people who are looking to invest their money to fulfil their financial goals. However, it is a crucial component of your financial plan to protect your loved ones financially in the event of your death.

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What Are the Term Insurance Benefits?

• Financial Protection for Your Loved Ones: In case of your untimely demise during the policy term, the death benefit will be paid to your beneficiary/nominee. They can use this money to cover funeral expenses, pay off debts, or any other financial needs.

• Affordability: Term insurance is typically very affordable, especially when you are young and healthy. The premium remains the same throughout the policy term, making it a wise choice to opt for a longer term.

• Flexibility: You can choose the term length that best suits your needs. For instance, if you have young children, it is recommended to opt for a longer term to ensure that the coverage lasts until they are adults. Whereas, if you are nearing retirement, it makes sense to choose a shorter term so that you can save money on premiums.

• Easy to Understand: Term insurance is a simple financial product that is quite easy to understand. You can easily calculate the term insurance premium and coverage you need using the online term insurance calculators available on different financial websites.

• Riders And Add-ons: You can add riders and add-ons to customise the coverage to your specific needs. Some of the most popular riders and add-ons are accidental death benefit, waiver of premium, critical illness benefit, accidental disability benefit, family income benefit, return of premium benefit, etc.

• Tax Benefits: You can avail of annual term insurance tax benefits of up to Rs 1.5 Lakhs per financial year under Section 80C of the Income Tax Act 1961 for the life insurance premiums you pay. Besides, if the premium is not more than 10% of the sum assured or the sum assured is at least ten times the premium, Section 10(10D) of the Income Tax Act makes the maturity benefit entirely tax-free.

• Peace of Mind: Knowing that your family is financially protected even in your absence gives you peace of mind.

Term Insurance vs Whole Life Insurance:

Whole Life Insurance offers continuous financial protection to the insured for their entire life, typically up to 100 years, as long as the policy remains active.

Unlike a term plan, in addition to the payout upon death, it includes a cash portion referred to as cash value, which grows gradually.

Individuals can access the accumulated cash value in times of financial urgency or use it as collateral to obtain a loan through a Life Insurance Loan.

What Are the Steps to Take When You Buy a Term Insurance Policy?

1. Understand Your Financial Needs:

To find the most suitable term life insurance, it is crucial to understand your family's financial obligations and requirements thoroughly. As you might be aware, the primary goal of term life insurance is to provide your family with a sense of security and steadiness. Hence, the policy you choose should have a sufficient life coverage amount that can effectively cater to your family's requirements in the event of your absence.

To determine the required coverage for a term life insurance plan, you should thoroughly evaluate all your income sources, the number of dependents, existing financial obligations, and your family's monthly expenses. Besides, it is also necessary to consider your spouse and children's future life aspirations.

2. Check the Term Insurance Premium:

The term plan premium depends on factors like chosen coverage, policy duration, plan type, age, gender, and lifestyle habits. By taking advantage of an online term insurance premium calculator, you can effectively determine the term plan premium for the desired coverage.

3. Choose Appropriate Riders And Add-ons:

Selecting suitable riders and add-ons is crucial in enhancing your insurance coverage. You can begin by identifying your specific needs - whether it is critical illness coverage, accidental death benefits, or disability protection. Carefully assess the cost-benefit ratio of each option. Ensure the selected riders provide comprehensive support without unnecessary overlap. The right mix of riders and add-ons can create a robust safety net, offering you and your loved ones peace of mind and financial security. However, make sure you regularly review and adjust your riders.

4. Buy an Online Term Insurance Plan:

Buying an online term plan offers numerous benefits compared to traditional offline methods. Online term plans provide not only convenience but also present a more cost-effective option.

To summarise:

When considering ensuring your family's financial well-being after your passing, a term insurance scheme is unparalleled. Despite recognising the significance of obtaining sufficient life protection, the task of selecting the appropriate scheme might appear daunting. This article aims to elucidate the distinct characteristics and advantages provided by the top life insurance providers, serving as a valuable guide. We have presented comprehensive details regarding the finest term insurance plans. Nonetheless, we recommend a thorough perusal of all policy-related documents prior to finalising any purchase.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.