Are you thinking of buying a term insurance plan but are not sure about its benefits? Read the article which talks in detail about term insurance plans, their benefits, their limitations and their uses. Find out if buying a term insurance plan is the right choice for you.
Everyone has different needs and obligations and hence have different purpose of buying a life insurance cover. Many think of a life insurance policy as an investment, the monetary benefits of which can be reaped when the policy matures. For others, it can mean bread and butter for their families in dire situations.
So, what is it for you?
Remember: Depending upon your current income, lifestyle, outstanding loans and number of dependents you will need to decide which life insurance covers all your needs.
The following sections will look in detail about one of the type of life insurance – term life insurance or simply term insurance.
What is Term Insurance?
As the name suggests, term insurance provides cover for a particular term period only. During the term you are required to pay premium to the insurance company. If within the term, the insured dies then the whole cover amount is released to the beneficiary.
Here are the basic features of term insurance plans:
- The plan is only for certain number of years like 10, 20, 30 years.
- The policy buyer will need to pay a fixed amount of premium annually.
- If the insured dies within the term period the cover amount is released.
- If the insured survives the term then no monetary benefits can be claimed.
- The plan can be renewed and the term period can be extended.
- The plan can be converted into other type of life insurance policy.
Since, no monetary benefits can be claimed at the end of the term (point no. 4 above) many people do not want to risk investing a part of their income into the plan. But, there are many benefits of term insurance plans and depending upon circumstances they can prove to be the best decision you make for yourself and your family.
Benefits of Term Insurance Plans
Simple and Straightforward
Understanding a term insurance is very simple. Most people are not very up to date with the various investment options available in the market. Hence, they find it difficult to comprehend other life insurance plans that have an investment feature.
With term insurance plans things are very clear. Pay a fixed, pre-decided amount for the duration of the term. That’s it. You do not have to worry about the fine print as is in the case of endowment policies.
Warning: Avoid plans with difficult to understand features. If you do not understand then do not buy.
The premium rate of term insurance plans is very less as compared to the premium rate of profit linked insurance plans.
For example, a 20 year term insurance plan that offers a cover of 10 lakhs will have a premium rate of just 3000 per year. On the other hand, an endowment policy for the same amount will have a premium rate that is ten times that of the term insurance premium.
Provides Tax Benefit
The premium paid under term insurance plans get tax benefit and the cover amount that is released is also tax free depending upon certain conditions.
Higher Coverage is Affordable
It is always better to get a high cover insurance plan.
Tip: Rule of thumb says that the life insurance cover should be 7 to 10 times your annual income. Hence, if you are earning say 30,000 annually you should buy a cover of 3 lakhs.
Now, in an endowment policy the premium is very high for a high cover. Here is a comparison between the term insurance premium and life insurance premium for 50 lakh cover amount.
As you can see there is a huge difference in the premium amount. Hence, people who have low income or irregular income will not be able to afford the endowment policies.
So, who will benefit from owning term insurance plan?
- Sole earners of the family, lower income group people, people on a tight budget
- People just starting a new career/business
- People having large loans
- Those who prefer other investment options than life insurance plans
Wrapping it up – Term Insurance Plans
Term insurance plans give you the assurance that in case of any unforeseen circumstance your family will not face any financial problems. It might not help you to save more, but will ensure that it will give your family all the basics that you ever wanted to give them.