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 –
- 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.
- 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.
- 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.
- 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.
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.
- Benefits payableUsually, 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.
- Tax benefitsTerm 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 –
- 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
- 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
- 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 –
- 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.
- Sum assured
The sum assured also affects the premium directly. If the sum assured is high, the premium would also be high.
- 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.
- 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.
- 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.
- 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.
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.
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.
- 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.
- 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
- 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.
The premium payment modes under term plans depend on the plan that you buy and its terms and conditions. Usually, premiums are payable throughout the policy tenure. However, under most plans, especially those which offer coverage for up to 99 or 100 years, premiums are payable only for a limited tenure. Moreover, many plans also allow for single premiums. So, check the policy details to know the premium payment modes.
Yes, you can choose to cancel the policy after buying it if you do so in the free-look period. Each term insurance plan allows a free-look period of 15 days from the date the policy is issued. During this period you can opt to cancel the plan and get a refund of your premium.
Yes, suicides committed within 12 months of buying the policy or reviving a lapsed policy would not be covered under term insurance plans. Under such situations, 80% to 90% of the premium paid is refunded back as a death benefit.
No, term plans usually do not allow surrender or paid-up benefits. If you stop paying premiums, the policy cover would lapse and you would usually get no benefit.
The types of discounts which you can find under term insurance policies include the following –
- Online discount – many policies allow you a premium discount if you buy the policy online
- High sum assured discount – if you choose higher coverage levels, you might enjoy a premium discount
- Modal discount – paying premiums yearly or half-yearly earn you discounts under many plans
- Non-smoker discounts – many policies offer you a premium discount if you do not smoke