A term insurance policy is a simple contract where an insurer pays a specific sum to your beneficiaries if you pass away during the policy’s tenure. It provides your dependents with a vital safety net during difficult times.
In this article, we will look into its basics and the various term insurance benefits. We will also learn how to use a term insurance calculator to find the best policy in India.
What is Term Insurance?
A term insurance policy is a type of life insurance that provides financial protection for a specified period. If the policyholder passes away during that term, the nominee receives a lump sum payout, known as the death benefit.
However, it is important to note that term insurance is a pure life cover. This means it focuses solely on providing financial protection. If the policyholder survives the policy’s tenure, there is no maturity or cash benefit paid out. The premiums paid for securing protection are also not returned.
Key Terms Associated With Term Insurance
Now that you have seen what term insurance is, let us look at some of the key terms and what they mean.
- Nominee
It is the person designated to receive the sum assured in the event of the policyholder’s death. The nominee can be a single person or multiple individuals.
- Sum Assured
It is the amount the nominee of the term insurance policy will receive if the policyholder passes away during the tenure.
- Premium
It is the amount payable to the insurer to keep the policy active. Premiums can be paid monthly, quarterly, half-yearly, or annually. The premium amount is determined depending on factors like age, health conditions, sum assured, and policy duration.
Why Term Insurance Matters?
Before we explore the various term insurance benefits, let us look at why purchasing one is very important for your family’s financial safety.
Protection for Dependents' Future Income and Expenses
The death benefit payout from a term insurance policy ensures that your family and dependents do not struggle to meet their expenses and future goals without your earnings.
Helps Cover Outstanding Loans and Liabilities
Outstanding loans and liabilities, like home or car loans, do not disappear after your death. The payout from term insurance helps your family settle these liabilities without financial strain.
Acts as an Income Replacement Tool
Term insurance can replace the income you would have earned over the years. By providing your dependents with a lump sum amount, it essentially acts as a replacement for your income.
Term insurance differs significantly from other life insurance products, like whole life or endowment plans. Traditional life insurance policies build cash value over time and offer maturity benefits. Term insurance, however, focuses purely on protection and does not provide any maturity payouts.
Term Insurance Benefits
If you are planning to secure your family’s future, understanding the following term insurance benefits is crucial, as it helps you make informed decisions.
High Coverage at Affordable Premiums
Since term insurance plans focus solely on the life cover without investment components, they are highly affordable. You can secure substantial life coverage for just a fraction of the premium compared to traditional life insurance policies.
Financial Protection for Loved Ones
If you pass away during the policy term, your nominee receives a lump sum death benefit. This immediate payout helps your family manage expenses and maintain financial stability during difficult times.
Additional Riders
The term insurance benefits can usually be enhanced further with riders. Some of the add-ons you can opt for include critical illness coverage and accidental death or disability coverage. Riders provide additional financial support for specific situations, creating comprehensive protection for various life events.
Tax Advantages
The premiums you pay towards term insurance are eligible for deduction under Section 80C of the Income Tax Act, 1961. This benefit reduces your tax liability while helping you build financial security for your family.
Discounts
Insurance companies offer discounts on premiums for non-smokers and younger applicants. Your healthy lifestyle choices and early planning can translate into significant savings over the policy term.
Peace of Mind and Financial Planning Support
Term insurance removes the worry about your family's financial future. It safeguards against unexpected expenses and helps ensure your dependents can achieve their goals irrespective of what happens to you.
How Much Cover Do You Need?
Being aware of term insurance benefits is not always enough. You must also know how much life coverage you need to opt for. Here are the key factors influencing this important decision.
- Age: Younger individuals must opt for the maximum possible coverage since they often require longer periods to protect their family's future.
- Income: A common rule suggests that you should opt for a life coverage of 10 to 15 times your annual income to replace lost earnings adequately.
- Liabilities: The life cover should be sufficient to clear outstanding loans like home mortgages, car loans, or personal debts without burdening your family financially.
- Dependents’ Expenses: The ongoing costs for your dependents, such as daily living expenses, healthcare needs, and special care requirements, must be considered when determining the coverage amount.
- Goals: Consider future financial goals like your children's education or marriage expenses. The coverage should ensure these important milestones remain achievable even in your absence.
Term Insurance Calculator
A term insurance calculator is an online tool that helps you determine appropriate coverage and estimate premium costs. It simplifies the complex process of calculating how much protection you need based on your unique circumstances. In addition to helping you save time, the tool also allows you to compare different scenarios by adjusting the coverage term and sum assured to find the best fit.
A typical term insurance calculator works by asking for basic inputs like your age, annual income, existing liabilities, and desired policy duration. It then uses this information to suggest an optimal sum assured and shows you the corresponding premium amounts.
Types of Term Insurance Plans
Term insurance comes in various forms to suit different financial needs and life stages. Here is an overview of the common types.
- Level Term Insurance: The sum assured remains fixed throughout the entire policy term.
- Increasing Term Insurance: The coverage amount increases at regular intervals, typically annually or every few years, to keep pace with inflation and rising living costs.
- Decreasing Term Insurance: The sum assured reduces over time and works well if you want coverage that matches your decreasing home loan or other debt balances.
- Return of Premium Term Insurance: If you survive the policy term, all of the premiums you paid will be returned. This option costs more than regular term insurance.
- Convertible Term Plans: These policies allow you to convert your term insurance into other life insurance plans, like whole life or endowment plans.
- Group and Joint Term Insurance: Group plans cover multiple individuals under one policy and are typically provided by employers. Joint plans cover two individuals, usually spouses, under a single policy with shared or individual coverage options.
Best Term Insurance in India – How to Choose?
Selecting the best term insurance in India requires evaluating multiple factors beyond just the premium cost. Here are the criteria you must examine.
Claim Settlement Ratio of Insurer
The claim settlement ratio indicates how many claims an insurer settles versus rejects. A higher ratio, ideally above 95%, suggests reliable claim processing and better chances of your family receiving the payout.
Premium Cost Versus Coverage
Compare the premium amount against the sum assured offered. This will help you shortlist plans that provide maximum coverage at competitive rates.
Riders Available
Check what additional riders the insurer offers, such as critical illness, accidental death, or waiver of premium. These add-ons enhance your protection and can be customised to match your specific risk profile and family needs.
Customer Service and Digital Experience
Evaluate the insurer's customer support quality, ease of policy management, and online claim processes. A responsive service team and user-friendly digital platform make policy administration smoother throughout the term.
Common Misconceptions
Several myths surround term insurance that prevent people from making informed decisions. Clarifying these misconceptions helps you understand the true value of term protection.
"If I do not claim, money is wasted."
The primary purpose of term insurance is to provide financial protection for your family. The real value lies in its ability to provide peace of mind and act as a safety net.
"Term insurance is an investment or savings product."
Term insurance is purely a protection tool, not an investment vehicle. It does not build cash value or provide returns. Its purpose is to replace your income and protect your family financially if you pass away during the policy term.
FAQs
What is term insurance, and how does it work?
Term insurance provides life coverage to the policyholder for a specific period. If the policyholder passes away during the term, the nominee receives a lump sum payout known as the death benefit.
How does a term insurance calculator help me choose coverage?
A term insurance calculator estimates your ideal coverage amount and premium costs based on your age, income, liabilities, and financial goals.
Is term insurance best in India for young earners?
Yes. Young individuals get lower premiums and longer coverage periods. Starting early maximises protection while keeping costs affordable throughout the policy term.
What are the tax benefits of term insurance?
Premiums paid toward a term insurance policy qualify for deductions under Section 80C of the Income Tax Act. You can reduce your taxable income by up to Rs 1.5 lakh annually.
Conclusion
Term insurance provides essential financial protection for your loved ones at affordable premiums. When determining the coverage you need, take the time to evaluate your financial needs, liabilities, and future goals. You may also use a term insurance calculator to make the process easier. Once you have shortlisted various plans, compare and contrast them to find out the one that suits you best.
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