Why is term insurance your best bet?

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New Delhi | Published: February 13, 2016 11:20 PM

A life insurance policy that does not provide sufficient financial aid to the dependents at the time of need just defeats the purpose of buying the policy altogether.

insurance policyA life insurance policy that does not provide sufficient financial aid to the dependents at the time of need just defeats the purpose of buying the policy altogether.

The purpose of any insurance plan whether life or non-life, is to provide financial safety and aid the policy holder (or his/her dependents) in the case of an unfortunate event. Buying life cover is important and ensuring that it is adequate is paramount. A life insurance policy that does not provide sufficient financial aid to the dependents at the time of need just defeats the purpose of buying the policy altogether.

If one is looking at buying life cover then apart from the amount of insurance cover, deciding about the type of policy is also important.  There are various types of plans to choose from; below we discuss basics about term insurance and how term insurance scores over other types of insurance plans.

Term Insurance Explained:

Term insurance plans are the vanilla ice creams of the insurance world. They are the most basic plans without any frills yet they fulfill the purpose well.  As is clear from the name, term insurance is insurance for a particular term. This term can vary from 10 to 30 years depending on the choice and age of the insured.

If the insured dies during the policy term and the policy is active the nominees get the sum assured. Sum assured is the lump sum amount the beneficiaries (nominees) get when the insured passes away. This sum assured in term plans is fixed and is not related to any external factors.

The premium paid by the insured depends on the age of the insured, policy term and the sum assured or cover that one seeks. These plans do not offer any money back or no amount is returned at the end of the policy period if the insured outlives the term.

Why are Term Insurance Plans a Safe Bet? 

Term insurance plans are products that are designed to cover the insurance needs of the individual and do not mix insurance with investments. The primary reason for buying a term plan is to provide sufficient and assured financial security to your loved ones. Being designed in a no fuss way gives these plans a few inherent advantages which are as follows:

Higher Cover at Low Premiums: When we compare the cover offered in term plans vis-à-vis premium paid they turn out be the most economically viable option. They offer higher cover at lower premium.

The premium paid for a term plan is much lesser than that would be required if a person wants to buy an endowment plan, ULIP or a money back policy that offers the same cover amount.

Since there is no investment component in these plans the entire premium is used to provide insurance cover which makes them a low cost high benefits option.

Could Help in Financial Planning: Term plans could also aid in financial planning. Depending on the life stage, number of dependants and liabilities the insured could choose to increase his life cover.

With an addition to the family you could choose to buy another term plan to match the additional needs; similarly if you take a home loan you could buy a term insurance that matches the loan amount and loan tenure.

The insured could choose to add specific riders and could also covert it to a whole life policy in certain cases. The amount that is saved by not buying an expensive insurance plan can be invested in another option that offers better returns.

Uncomplicated and Flexible in Design: When you buy a term plan, you are sure that if you pay a fixed amount as premium every year, your dependants are assured of getting a predefined amount in the unfortunate event. This amount will not change due to market conditions, the companies profit or loss or any other factor.

This provides certainty and you can plan exactly as per your needs how much cover your dependants require. Since no part of your premium invested you do not have to keep a track of what is being invested and what is being used to provide you premium. This can get complicated for a layman. While it is fixed in the sum assured; these plans provide you flexibility in paying premiums annually, bi-annually or quarterly.

Tax breaks on all insurance plans are an additional advantage. However it is important to remember that term plans should be bought as early as possible because with progressing age they become cost prohibitive and lose the edge of being economical when compared to other options.

By CreditVidya

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