Life is uncertain. Even though you know that death is inevitable, if the inevitable strikes prematurely, your family suffers an emotional as well as a financial loss. While the emotional loss cannot be compensated against, the financial loss can be. This is where a term insurance policy comes into play.
A term insurance policy is a pure protection oriented life insurance policy. The policy covers the risk of premature death. If the insured dies during the term of the plan, the plan pays a guaranteed death benefit. If the breadwinner of a family invests in a term insurance plan and then dies prematurely, the term insurance policy helps in compensating the family against the financial loss that they suffer. A term insurance plan pays a financial corpus to the family that takes care of their financial needs and goals in the absence of the breadwinner.
Term insurance benefits
A term insurance plan has numerous benefits making the plan a must buy. Here are some of the main term insurance benefits that you should know about –
- Cost-effective coverage
A term insurance plan is the most basic of all life insurance policies. The plan primarily covers the risk of premature death and is, therefore, priced low. Term plans are, in fact, the cheapest of all life insurance plans. There is, usually, no limit to the sum assured that you can opt under the policy. Thus, a term insurance policy allows you to opt for a high level of coverage and, that too, at an affordable rate of premium. So, you can secure your family’s financial needs optimally without burning a hole in your pockets.
- Comprehensive coverage
Modern-day term insurance plans have expanded their scope of coverage. Rather than covering only the risk of premature death, today’s term insurance plans allow various types of coverage options. You can find various plan options available under term insurance plans and avail coverage against the following contingencies too –
- Critical illness
- Accidental death
- Accidental disablement
- There is an option to avail of whole life coverage wherein term plans run till 99 or 100 years of age giving you lifelong coverage. You are also given the choice to enhance the sum assured on marriage or childbirth to account for increased financial responsibilities. So, you can opt for all-inclusive coverage by investing in a suitable term insurance policy.
As mentioned earlier, term plans, nowadays, come in many different variants. These variants are optional giving you room for customization. You can choose the coverage benefits that you need under the policy. The premium can also be paid regularly, for a limited period or in a single instalment as per your affordability. Even when it comes to the death benefit, many term insurance plans allow the option of receiving the death benefit in a lump sum, in monthly incomes (uniform or increasing) or even in a combination of both. So, you can tailor-make your term insurance cover as per your coverage need and get the best policy.
- A plan for every need
There are different types of term insurance plans that are available in the market. These types include the following –
- Level term plans wherein the sum assured remains the same throughout the policy tenureIncreasing term plans wherein the sum assured increases constantly every yearDecreasing term plans wherein the sum assured reduces every year, usually in tandem with the reducing balance of your loan. These types of term plans are also called mortgage redemption plans and can be taken with loans.Return of premium plans wherein the premium paid is refunded back if you survive till the maturity of the policy
- Easy availability
Term insurance plans are available both online and offline. Thus, you can find and buy the policy easily. The online medium has, especially, made it easier for you to buy a term insurance policy from the comfort of your own home or office. You can simply visit the website of the insurance company, fill in your details and buy the policy that you want. Alternatively, you can visit www.turtlemint.com and compare between the available term plans, choose the best policy and buy it online in simple steps. Thus, buying a term plan is easy allowing you to invest in one conveniently.
- Financial security
The primary objective of a term insurance policy is to provide financial security to you and your family. When you know that your family would be financially taken care of in your absence, you get peace of mind and are financially secure. Similarly, in your absence, when your family receives financial assistance from a term insurance policy, they can meet their lifestyle expenses and also fulfil their financial goals. Your children can get the education that they need and your family can meet its financial obligations. This gives your family financial security too making a term plan the perfect tool for income replacement when you are not around.
- Tax benefits
Lastly, term insurance tax benefits cannot be ignored. Term plans are tax-effective plans that give you tax benefits both at the time of investment as well as when the plan benefit is paid. The premiums that you invest in a term insurance policy are allowed as a deduction under Section 80C of the Income Tax Act, 1961. You can claim a deduction of up to INR 1.5 lakhs under Section 80C, provided the premium is up to 10% of the sum assured. The death benefit that your family receives is completely tax-free in nature. Moreover, if you have opted for the return of premium term plan, the premiums that you get refunded on maturity would also be completely tax-free in your hands under Section 10(10D) of the Income Tax Act, 1961 provided the premium did not exceed 10% of the sum assured. So, term insurance tax benefits make the term plan a dual-benefit plan – one that creates financial security and the other that gives tax benefits.
Why choose a term insurance plan?
The requirement of a term insurance plan stems from the fact that the policy covers the most important risk that you face, the risk of premature death. Since you cannot predict death, you can prepare against an unforeseen contingency by investing in a term insurance plan so that your family remains financially protected whether you are around or not. With low premiums, term plans allow you the choice of a high coverage ensuring that you provide the desired financial protection to your family without pinching your pockets. So, a term insurance policy is needed for the fulfilment of your financial goals in your absence.
How much term insurance cover is needed?
When you buy a term insurance plan, you should ensure that you choose an optimal level of sum assured so that your family is financially secured. To calculate the ideal amount of coverage there are various methods. Some of the most popular methods are as follows –
- Basic income method
This is the most basic method for calculating the sum assured. Under this method, the optimal level of coverage is assumed to be 10 to 12 times your annual income. So, if you earn INR 10 lakhs in a year, the ideal coverage should be around INR 1 crore to INR 1.2 crores.
- Human Life Value (HLV) method
The HLV method is another popular method that tries to estimate the economic value of your human life. The HLV method calculates the income that your family would lose in case of your premature demise. Under this method, the sum assured is selected in such a manner that it generates an income equal to the income that you provide to your family. Let’s understand with an example-
Say you earn INR 10 lakhs in a year and, after expenses, your disposable income is INR 6 lakhs. Now, you need a sum assured which, if invested in a risk-free avenue, yields INR 6 lakhs for your family every year. So, if the risk-free rate of interest is considered to be 7%, the corpus needed would be approximately INR 85.71 lakhs. If this corpus is invested @7%, your family would earn an income of INR 6 lakhs every year even in your absence.
- Underwriter’s thumb rule
This method is similar to the basic income method wherein the sum assured is determined based on your income. However, under this method, your age determines the multiple. If you are aged between 20 and 30 years, the multiple is 15 while for ages between 31 and 40 years, the multiple reduces to 14. As your age increases, the multiple reduces since your economic value reduces as you near retirement.
- Fact-finding analysis
This is, by far, the most realistic approach to calculate the sum assured and requires detailed calculation. Under this method, your income, expenses, assets and liabilities are taken into consideration to find out the financial corpus that your family would need. Provision is also made for inflation to arrive at a realistic figure.
You can, therefore, use any of these methods to arrive at the most suitable sum assured that you should opt for.
Importance of term insurance in 2021
A term insurance plan is an evergreen insurance plan which is important for every age and every year. However, with the current COVID pandemic which has resulted in premature deaths, the plan has become all the more important. If you want to protect your family financially you should opt for a term insurance plan and create financial security for them. The term insurance benefits speak about the importance of a term plan which is a must for your financial portfolio. Moreover, the term insurance tax benefits also help you reduce your tax liability.
You don’t know what the year 2021 would bring but you can secure yourself and your family against unforeseen contingencies by investing in a term insurance plan.
Affordability of the premium is important since term insurance plans are a long term contract and if you don’t pay the premiums in a timely manner, you would lose out on the policy benefits. If the annual premium is unaffordable, you can opt for monthly, quarterly or half-yearly premium payment modes. Alternatively, you can invest in a low sum assured initially and then, when your income increases, you can buy another term plan or opt for sum assured enhancement (if your plan allows). This would enhance the coverage and, with an increased income, make the premiums affordable too.
Yes, term insurance plans do not cover suicidal death if such death occurs within a year of buying or reviving the policy. In case of suicidal death within a year of the policy, 80% of the premiums paid are refunded. On the other hand, in case of death within a year of policy revival, a higher than 80% of the premium paid or the surrender value (if any) would be paid.
Yes, term insurance plans cover both natural as well as accidental deaths.
Riders are additional coverage benefits that you can choose with the base term insurance policy. Riders are optional coverage features that come with an additional premium. If you choose the available riders, the premium of the policy would increase. Common riders which are available with most term insurance plans are as follows –
- Accidental death and disablement rider
- Critical illness rider
- Waiver of premium rider
- Family income benefit rider
Term insurance plans charge a lower amount of premium from females and non-smokers. Moreover, if you choose to pay the premium annually, half-yearly or, quarterly, you can avail of a modal discount too.