Large parts of the populace are waking up to the importance of having a term insurance plan. And this is why these plans are becoming popular. The life insurance market, too, is rising to the increasing needs and wants of the discerning customer.
Large parts of the populace are waking up to the importance of having a term insurance plan. And this is why these plans are becoming popular. The life insurance market, too, is rising to the increasing needs and wants of the discerning customer. Therefore we’re seeing useful features being added to insurance plans.
With a plethora of features and benefits, these new-age insurance plans can be confusing even to the financially aware, not to mention those who are unaware of the whole concept of term plans.
So this article acts as a guide to beginners to term insurance plans. We’ll glance at the term insurance market and understand all the bells and whistles
that come with these plans.
What is a term insurance plan?
A term insurance plan is a pure life insurance that covers your death risk. You choose the sum assured (the cover amount) and the plan term (the duration for which the plan would run). The premium is then decided based on your age, sum assured, health risks, and plan term. In case of death during the plan term, the sum assured is paid by the insurer to the insured’s nominees. Unlike other life insurance options such as endowment plans, cashback plans and ULIPs, there is no maturity benefit or investment value in a term plan. Your premium is allocated only towards mortality charges in a basic term plan.
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What are the features of a term plan?
A term plan has common features which are as follows:
Tenure – Term plan tenures typically range from 10 to 40 years, subject to the age of the insured. The entry age may range from 18 years to 65 years, and the maximum maturity age allowed under a term plan may go up to 80 years. For example, if you are 45 years old, some insurers may allow you a maximum coverage of 35 years after which you turn 80. You should opt for the highest possible term to enjoy coverage for the maximum possible age.
Claim Settlement Ratio: This is the ratio of claims that an insurance company honours. For example, if an insurer receives 100 claims in a year and settled 96, its CSR is 96%. While buying an insurance plan, you must look at insurers with the best possible CSR.
Sum Assured & Premium – Term plans allow you high coverage at low premium rates compared to traditional, investment-linked life insurance plans. This is the USP of term plans. By allowing substantial coverage at affordable rates, term plans ensure accessible financial security.
Types of plans – Term plans come in five different variants which are as follows:
Level term plans – also called the basic term insurance plan, this plan pays the sum assured on death during the term.
Increasing term plans – the sum assured increases every year by a specified percentage.
Decreasing term plans – the sum assured reduces every year by a specified percentage.
Return of premium plans – term plans, except this one, do not have any maturity benefit. In return of premium plans, if you survive the tenure, the aggregate premiums you have paid would be returned on maturity.
Monthly income plans – these plans pay the death benefit partly in monthly incomes and partly in lump sum.
Riders – Riders are additional optional coverage options which can be added to your term plan for increased protection. Additional premium is payable if you add riders to your policy. However, many term plans also have inbuilt riders. Some common riders available with most term plans, both inbuilt and optional, include the following:
Accidental death or/and Disability rider which pays an additional benefit if you suffer an accidental death or disability.
Critical illness rider which pays a lump sum benefit if you suffer from any one of the illnesses covered by the rider.
Waiver of premium rider which waives off your premiums payable if you become disabled during the plan tenure. Some plans also waive the premiums in case of critical illnesses.
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How is it different from other life insurance plans?
Term insurance differs from other life insurance products in the following manner:
How to buy a term plan
Term plans can be bought either offline or online.
Offline – Offline term plans are sold by agents and brokers. These plans have a slightly higher premium due to the commission payable to the middlemen.
Online – Online term plans are sold directly by the insurance company and are, thus, cheaper. Online term plans are also sold through financial aggregators where you can compare products and make an informed decision in order to avoid mis-selling.
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Importance of term insurance
A term insurance plan fulfils the insured’s income replacement need and ensures financial security for his family. It helps in case of the insured’s premature death when his family could face both emotional and financial trauma. The benefit paid by the plan provides a substantial corpus to the insured’s dependents who can then meet their long-term financial obligations, such as the paying of rent or EMIs, completing children’s education, and meeting the day-to-day expenses.
The general thumb rule for buying a term plan is whether you have dependents. If you do, you can cover your family’s long-term finances even in your absence, and this would bring you peace of mind.
(The writer is CEO, BankBazaar.com)