Term insurance is insurance at its purest and simplest form and is described as the ‘real’ insurance since there is no element of investment involved in it. It pays benefits only upon the policy holder’s death (which enables the policy holder’s heirs to cover mortgage and college cost, estate taxes, and funeral expenses) or else the amount is treated as an expense. Since there is no value of financial investment or a savings element involved, the premium accounts only for the risk cover costs (mortality costs) and hence is very low compared to other insurance products. In fact the policy offers cover on the life of the insured and is also the cheapest form of life insurance which gives the policyholder the maximum protection for a given amount of annual premium. The premium of term insurance policy depends upon the mortality risk and increases proportionately with the age of the life covered. Thus, it is recommended to purchase a term insurance policy early in life. However, despite the positives of term insurance the policy is rarely promoted by either the insurance company or the insurance agents.
The various term plans that the market offers bear the same features with minor differences in their tenure, minimum and maximum sum assured, maximum entry age, cost of plan amongst others. An individual who pays premium on term insurance policies is eligible for tax deduction u/s 80C of the IT Act, 1961; death benefits are exempt u/s 10(10d) of IT Act, 1961; and premium paid on critical illness riders is eligible for tax benefit u/s 80D of IT Act, 1961.
Types of Term Insurance
Level Term: Level premium term insurance guarantees that premiums remain the same each year for the term of the policy, generally 5 to 20 years. Insurance companies keep premiums the same by charging an average of the premiums they would ordinarily charge with an annual renewable policy. The advantage of level premium term insurance is that premiums stay the same throughout the tenure of the policy.
Increasing and Decreasing Term Insurance: In this type of policy the insured has the option of changing the policy amount. The insured can either choose to increase the amount or to decrease it. However in any case the insurance premiums remain consistent over the whole term.
Renewable Term: In this type of term insurance the insured has the option of renewing the policy after its maturity (i.e. if an insured does not die during the term for which the insurance is taken he has the alternative to renew it after that period). However, it needs to be understood that the insured will be required to pay a higher amount of premiums on such renewals. Post renewal the sum assured will be paid to the dependent of the insured in the case of death of the policyholder.
Convertible Term Insurance: In this kind of policy the insured has the option of converting the term insurance into other policies and it is advisable for those who require permanent protection after a point of time.
Group Term Insurance: The term group insurance is usually taken by an employer. The premiums are collected from the monthly salary of the employee and deposited in the insurance company. However unlike other insurance policies, group term insurance is taken only for specific period.
In case of annual renewable term insurance, the premium paid by policy holder is lower initially, which increases annually with the increase in age. However, in case of level term insurance, the premium amount is remain the same for a certain time period post which increase in premium is set for fixed block of time (in years). It is highly recommended in case of term insurance to go for policies which are convertible, as such may switch to a cash-value plan later if required.
Further you as a policy holders, should only subscribe for a guaranteed renewable policy, as such their coverage cannot be terminated if they have any kind of health problems.
Advantages of Term Life Insurance
• The term insurance policies have flexible duration
• It is inexpensive as compared to other insurance policies
• It pays death benefits to the beneficiary/dependants
• It covers the final expenses and provides a lump sum to the dependants
• It covers the policy holder for the full amount of life insurance chosen
• It can be converted and renewed depending on the policy
• It is a good alternative for temporary insurance needs