Term Life Insurance – the most basic and yet the most effective and important insurance plan for everyone. Experts recommend it, critics heap praises on its importance and common men, who have benefitted from the plan swear by its benefits. The cost-to-benefit ratio of the plan is so good that even the most cynical of the individuals have sat up and taken notice of the humble term plan.
For those of you who are still wondering why we are creating such brouhaha over a term plan let me shed some light on the plan in general. A term insurance plan is a life insurance plan which allows a high Sum Assured coverage at very low rates of premium. The plan, usually, only covers the death risk of the person insured and so, the benefit under the plan is payable only if the insured dies during the plan tenure. If the plan attains maturity, under pure term plans, no benefit is paid back to the policyholder.
So, this was the general brief on the meaning of a term insurance plan. Though easy to understand, there are many different facets to a term insurance plan which many people fail to grasp. Due to the inherent technical nature of the insurance subject altogether and the various features and uses a term insurance plan can be put to, there are bound to be questions. So, here we have compiled a list encompassing the 10 most common questions that people have when it comes to buying or continuing a term insurance plan. So read on, the list might throw some light on questions that you might also be facing too!
Question #1 - What are the benefits of a term insurance plan?
This is primarily the first question which pops in our mind when we consider buying a term insurance plan. The basic benefit which a term insurance plan bestows upon a policyholder is the provision of sufficient life coverage at the lowest rates. This is the only plan of insurance which is designed for fulfilling the income protection requirements of individuals without burning a hole in their pockets. Other benefits include:
Peace of Mind – the plan promises the payment of a lump sum benefit if the insured dies during the tenure of the plan. The benefit provided is huge (if the policyholder made a correct choice of Sum Assured) and provides a financial cushion to the bereaved family. Thus, the policyholder, by buying a term insurance plan on his own life with a sufficient Sum Assured, can ensure the financial stability of his dependents even when he is not around. This assurance provides every individual with peace of mind free from financial worries.
Redemption of loans – term plans come in various variants and a decreasing term insurance plan is one such variant of a term plan. A decreasing term plan is one where the Sum Assured decreases every year and the plan is usually taken with a loan. The decreasing Sum Assured shows the outstanding balance of loan and in the event of death of the borrower, the plan is used to pay off the outstanding loan. Thus, mortgages and loans do not burden the family after the insured’s death.
Question # 2 – How to buy an ideal term insurance plan?
An ideal term plan is a relative subject and depends on the insured’s requirements. A fact-finding exercise is required to assess your financial and future requirements based on which an ideal plan can be bought. However, some facets which should be remembered when buying a term plan so as to make it an ideal one is as follows:
Sum Assured – since a term plan provides the cheapest coverage, you should always aim for the maximum coverage based on your financial worth. An analysis of Human Life Value or requirement of a corpus based on income and future expenses should be done to calculate the required Sum Assured. The baseline, however, is that a high Sum Assured should be chosen.
Term – the plan tenure should also be kept long. Choose a plan which offers the highest tenure of coverage because buying a plan later in life would be expensive and also restrictive in terms of coverage.
Buy online – companies are also offering online term insurance plans which eliminate the necessity of middlemen. Such plans are cheaper, easy to buy and faster than those bought from agents and also allow you the facility of comparison among other available plans.
Question # 3 – What is the difference between online and offline term plans?
There is no difference other than the premium rates. Online plans are available directly without the involvement of middlemen and thus come cheap. Other features and benefits are similar to those offered by offline term plans.
Question # 4 – Is buying an online plan secure?
Yes, given the technological advancement and the increasing dependency on the online medium, companies have made the online platform highly secure and safe. Buying a plan online is also safe and free from fraud.
Question # 5 – Is the premium for terms plan same for everyone?
Of course not! Premiums for an insurance plan depend on the age of an individual primarily. Even individuals of the same age might be charged a different premium because the premium is calculated on various parameters. Some of those parameters include the following:
The coverage and term – the level of coverage and the plan tenure chosen affect the premium. Higher the coverage, higher the premium and higher the tenure lower the premium.
The insured’s medical and family history – prevalence of a medical ailment increases the risk and increases the premium
Lifestyle habits – participation in hazardous activities, smoking and drinking increase risk and hence the premiums are high
Occupational hazards – occupation of the insured which increases his life risk increases the premium.
Question # 6 – Does the premium of a term plan change during the plan tenure?
No it doesn’t. Term Insurance Plans quote a premium taking into consideration all the relevant factors (as mentioned earlier). Once set, the premiums do not change over the entire tenure of the plan.
Question # 7 – What are the different types of term plans?
Term insurance plans come in four variants which are:
Level term plan – the simplest form of term plans where the Sum Assured remains the same throughout the plan tenure and is paid on death of the individual.
Return of premium plans – these plans have a maturity benefit where if the plan matures, the premiums paid under the plan are returned.
Increasing Term plans – in these plans, the Sum Assured increases every year during the plan tenure while the premium remains the same.
Decreasing term plans – these plans are also called mortgage redemption plans. The Sum Assured decreases in these types of plans.
Question # 8 – Can I claim the benefit in case of accidental death?
A term plan covers all forms of death, whether natural or accidental. The death benefit, thus, would be paid in case of accidental death if the death occurs within the plan tenure. A suicidal death, however, if committed within 12 months of buying the plan, is excluded from coverage. In this case, only the premium paid is returned to the nominee.
Question # 9 – What happens if I discontinue paying the premiums?
You should ideally pay all the premiums due in your term plan on time. If premiums are due beyond the due date, a grace period is allowed for paying the premiums. If the premium is not paid even in the grace period the policy would lapse. A lapsed policy has reduced benefits called the paid-up Value. In a lapsed policy the Sum Assured would be reduced in proportion to the premiums you actually paid against the total premiums payable. This reduced cover would defeat the whole purpose of a term plan and so, paying the premium is always advised.
Question # 10 – Would I get any income tax benefits?
Life insurance plans appeal to most of us because of the inherent tax benefits and a term plan is no different. The premium that you pay for the plan would get tax relief up to a limit of Rs.1.5 lakhs as per the current tax provisions under Section 80C of The Income Tax Act 1961. Even any claims which you receive in your policy would be tax-free under Section 10(10D). What’s more, there is no limit on the claim benefit received and the entire amount would be tax-free.
Most of us have these questions when we consider buying a term insurance plan and we hope we have allayed most of your fears about the product. With its unparalleled benefits and importance a term insurance plan should be a quintessential component of your financial portfolio. So what are you waiting for? Your questions have been answered. Shouldn’t you be taking the next step? And what is it? Well, buying the plan, what else!
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