Term insurance provides life insurance protection to the policyholder for a specified term and provides death benefit to the nominee in case of the policyholder’s death. Term life insurance is similar to traditional life insurance in all other ways except that there is no investment component in term insurance.
So, what is term insurance and how does it work? Term insurance is the simplest and most cost-effective form of life insurance. Term insurance allows the insured to get a higher sum assured by paying a nominal insurance premium. Term insurance ensures that your family will never have difficulty in meeting life’s goals, even in the event of your unfortunate absence.
Despite the importance of term life insurance in our lives, many Indians are acutely under-protected, with only 2 out of 10 people under term life insurance protection.  This can be primarily chalked down to a lack of awareness among the masses. In order to increase awareness, it is crucial that Indian consumers understand how term insurance works, its salient features, benefits and the various parameters to consider when purchasing a term insurance plan. Here, we cover just that.
Working of Term Life Insurance
The primary objective of buying term insurance is to provide for the living expenses and meet the financial goals of your dependents in your absence. Generally, term life insurance provides death benefit to the nominee in case of the policyholder’s death. Certain insurance providers also provide maturity benefits to policyholders who survive the policy term. This is done in the form of ‘return of premium’ benefits.
However, term insurance does not provide coverage for all types of deaths. There are some inclusions and exclusions that apply in different scenarios. This is how term insurance works in various types of deaths:
Types of deaths covered:
- Natural death due to medical condition or sudden death
- Accidental death
- Suicide that occurs within 12 months of the date of policy commencement (80% of the premium paid if it’s a non-linked plan and 100% of total premium paid if it’s a linked plan)
Types of deaths not covered:
- Suicide after 1 year of policy commencement
- Death caused by self-inflicted wounds
- Death caused by involvement in hazardous or adventurous activities
- Death due to sexually transmitted diseases such as AIDS
- Accidental death while driving under the influence of alcohol or drugs
- Death due to involvement in anti-national, terrorist or criminal activities
- Murder committed by the beneficiary (nominee) on the policyholder (insured)
- Death due to natural calamity unless opted for a rider
How do different term insurance plans work?
In its basic form term insurance provides death benefit (sum assured) to the beneficiary in case of the insured’s death during the policy term provided the premium has been paid regularly.
However, there are various types of term insurance policies that can be customized to the needs of people with varying coverage goals. We’ll discuss a few important types of term plans below and understand how term life insurance works in each of these product types.
- Level term insurance plan – This is the default type of term insurance plan where the sum assured and premium amount does not change during the length of the policy term.
- Decreasing term insurance plan – In such types of plans, the sum assured under the policy decreases every year while the premium amount remains constant. The cost of premium is lower in such plans.
- Increasing term insurance plan – In this plan the sum assured increases every year and the premium amount may remain constant or increase depending upon the policy’s terms and conditions. The premiums for such policies are generally inherently high.
- Term insurance with return of premium – If you want to get your all your term life premium back on maturity, this is the right policy for you.
In addition to choosing the type of coverage, you can also choose to enhance your coverage with the help of riders. You can choose from a variety of riders, including:
- Critical Illness Rider
- Accidental Death Benefits
- Accidental Total Permanent Disability
- Child Support Benefits
It is essential that one compares the different features and benefits of term plans available online before zeroing in on the plan of choice.
5 things to ask before buying term insurance
What is the right sum assured to secure my family’s future?
As a rule of thumb, ensure that the sum assured amount is 10-12 times your annual income to take care of your loved ones in your absence. So, if you are earning Rs. 12 lakh per annum, you should get a sum assured of at least Rs. 1.2 crore.
How long should be the tenure of my term plan?
The tenure of your term insurance plan will depend upon your current age and financial liabilities. If you are in your 30s, you should go for a term plan of at least 30 years as the remaining period will give you enough time to build a corpus, fulfil your responsibilities and lower your liabilities.
Will my term insurance premium increase in the future?
Generally, the premium should remain constant unless you have suffered a disability, developed a life-threatening disease or started smoking and drinking.
Do I need to disclose my smoking and drinking habits to the insurance company?
Yes, to avoid claim rejection in the future due to non-disclosure of vital information, it is important to disclose your smoking and drinking habits.
Can I have more than two-term insurance policies?
Yes, but you need to disclose about these policies to all your insurers to avoid problems in the future.
In today’s day and age it’s important to understand what term insurance is and how it works as the security of your family’s future depends on it. If you are yet to take that small but important step to secure the future of your loved ones with term insurance, do it today. Secure your family’s future with a Term Plan available on Finserv MARKETS and enjoy peace of mind and hassle-free claims. You can get access to a high sum assured of Rs. 1 crore at nominal rates starting at just Rs. 13 a day. You can also avail of a critical illness rider that covers up to 55 illnesses. Opt for term insurance on Finserv MARKETS for optimum financial security.
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