Term insurance meaning

A term insurance plan is a pure protection life insurance plan. It offers to provide you with very high coverage levels at affordable premiums. You can also choose the coverage duration. In case of death during the term of the coverage, term insurance plans pay the sum assured to the family. Since you could afford a high sum assured level, your family is financially taken care of after your absence. Thus, through a term insurance plan, you can create financial security for yourself and your family members.

Features of term insurance plans

Term insurance plans come with the following salient features –

1. High sum assured

   The main objective of a term insurance plan is to provide financial security. This security can be achieved only when the coverage level is sufficient enough to cover the financial requirements of your family in your absence. That is why, to ensure that your family is sufficiently secured, term insurance plans allow high coverage levels. You can opt for the desired sum assured based on your financial requirement. Usually, it is recommended that your term insurance coverage should be at least 10 to 12 times your annual income. So, term plans allow you unlimited coverage levels to ensure optimal coverage.

2. Low premiums

   A high sum assured cannot be sustained if the premiums are not affordable. Term plans mostly cover the risk of premature death and so the premiums are very low. In fact, term insurance premiums are the cheapest among all life insurance plans. So, you can choose a high coverage level without having to worry about unaffordable premium rates.

3. Long coverage tenure

   The coverage duration allowed under term plans is long to ensure that you remain covered even in your older ages. Term plans grant you coverage for up to 30 or 35 years depending on the plan that you choose.

4. Different types of plans

   Term plans come in different variants to suit the coverage needs of different individuals. You can, therefore, select a variant which meets your coverage requirements.

5. Riders

   To make your coverage more comprehensive, term insurance plans offer you optional riders. Riders are additional coverage benefits which can be added to your basic policy for enhanced coverage. Some of the popular riders which are available with term plans are as follows –

   • Accidental death benefit rider – under this rider, an additional sum assured is paid in case of accidental death
   • Accidental death and disablement benefit rider – under this rider, both accidental deaths and disablements are covered. In case of death, an additional sum assured is paid. In case of disablement, the sum assured is paid in instalments for a specified period and the premiums are also waived off
   • Critical illness rider – under this rider, a list of critical illnesses are covered. If any illness is diagnosed during the coverage period, a sum assured is paid in a lump sum
   • Terminal illness rider –under this rider an additional sum assured is paid if the insured suffers from a terminal illness
   • Term rider –under this rider, an additional sum assured would be paid if the insured dies during the policy duration, whether by accident or not.
6. Benefits payable

   Usually, term insurance plans pay only a death benefit if the insured dies during the term of the policy. If the insured survives till the end of the term, no benefit is paid on maturity. However, there are the return of premium term plans which refund the premiums if the plan matures.

7. Tax benefits

   Term insurance plans also provide you with dual tax benefits. The premiums that are paid for the policy qualify as a tax-free deduction under Section 80C of the Income Tax Act. You can claim a deduction of up to INR 1.5 lakhs. The benefit that you receive from the policy is also tax-free. The entire benefit that you receive is completely tax-free in your hands under Section 10 (10D) of the Income Tax Act.

   You can choose as many riders as you want. Under some plans, one or two of the above-mentioned riders can also come as an inbuilt coverage benefit. 

How do term plans work?

When you buy a term insurance policy, you first choose the type of policy that you need. Then you choose the sum assured and coverage duration based on which your premiums are calculated. You are required to pay the premiums over the specified premium paying tenure. If, during the coverage tenure, you face premature death, the policy pays a death benefit to your family. If, on the other hand, you survive the plan duration and you have not chosen a return of premium plan, no benefit would be payable. 

Advantages of term insurance plans

Term insurance plans provide you with the following benefits –

1. The premiums are very low and therefore you can afford a considerable sum assured for yourself. If the sum assured is high you can ensure sufficient financial security for your family
2. The plan provides unparalleled coverage which is not provided by any other life insurance plan or investment plan. This coverage is essential to protect against premature death and the financial consequences suffered thereafter
3. The tax benefits provided by the policy also helps you lower your tax liability. This helps you save your hard earned money U/S 80C while at the same time ensuring coverage. 

How term insurance premiums are calculated?

The premiums of term insurance plans depend on a lot of factors. These factors affect the premiums negatively as well as positively. Let’s understand these factors and their effect on premiums –

1. Age of the insured

   Premiums are directly linked to the age of the insured. If the age is more, the premiums would also be high. Thus, increasing age has a negative impact on the premium as it increases the premium amount.

2. Sum assured

   The sum assured also affects the premium directly. If the sum assured is high, the premium would also be high.

3. Term of the policy

   The policy tenure is inversely related to the premium. If you choose a higher tenure, the premium would be reduced and vice-versa.

4. Premium paying frequency

   If you pay premiums monthly, the company incurs a higher administration charge. That is why monthly premiums are higher than annual ones.

5. Medical health

   If you are suffering from a medical sickness or if you have any medical ailments, it increases your mortality risk. As such, the premiums also increase.

6. Smoking habits

   If you are a smoker, your mortality risk is high. That is why insurance companies charge a differential premium rate for smokers and non-smokers. The rates are higher for smokers and lower for non-smokers.

7. Gender

   Males have a higher mortality rate than females and that is why premiums for female lives are also cheaper than male lives at the same age.

8. Occupation

   If you are employed in a dangerous occupation which affects your mortality risk, the premiums would be high. For instance, if you are a pilot, air hostess, politician, in defence forces, in police, your mortality risk would rise. Premiums of term insurance plans, therefore, would be higher for individuals engaged in such risky professions.

9. Physical build

   Your height and weight also affects your premium because these parameters determine your health status. Being overweight or underweight is a cause of concern as it makes you unhealthy and increases your mortality risk. To compensate for this increased mortality risk, higher premiums are charged.

10. Riders selected

    If you opt for optional rider coverage benefits, the premiums would increase. Each rider comes at an additional premium because it offers an additional scope of coverage. So, if you choose one or multiple riders, their respective premiums would be added to the premium of the base policy and your overall premium outgo would increase

11. Discounts allowed

    Term insurance plans allow different types of premium discounts which help in lowering the premium charged. If you are eligible for these discounts, your premiums would reduce.