In the recent past, young adults have also started to realize the importance of purchasing life insurance plans. According to reports, the insurance penetration in India surpassed 3.4 percent in FY16, and the insurance industry is expected to reach US$ 280 billion by 2020. In FY17, the insurance penetration reached 3.69 percent, and in FY19, the gross premiums written in the country reached US$ 82.8 billion, with US$ 58.5 billion coming from the life insurance sector. Furthermore, the life insurance industry in India is also expected to grow 12-15 percent annually, for the next three to five years [2].
Various factors, including demand for retirement products like annuity, and growing urbanization are expected to drive the growth of the life insurance sector in the country. Furthermore, the life insurance industry also accounts for nearly 75 percent of total insurance premium.
Types of Life Insurance Policies
Life insurance policies can be term insurance plans, Unit-Linked Insurance Plans (ULIPs), traditional endowment plans, money back plans, retirement plans, whole life plans and annuity plans.
What is Term Insurance Policy
Term insurance, also known as pure life insurance is a plan which provides coverage for a specified period of time, and guarantees payment of a specified benefit on death. In the event of demise of the insured during the policy period, the death benefit is payable to the nominee or beneficiary. Furthermore, the premiums for term insurance plans are lowest as compared to all other life insurance plans, considering there is no investment component, and the entire premium is used to cover the risk and expenses.
However, if the policy term expires while the policyholder is alive, there is usually no maturity benefit, while there may be few term plans that have the option of returning the premiums paid by the insured. Traditional term policies mostly offer guaranteed death benefit. Furthermore, the premium to be paid by the policyholder is set by the insurer, and depends on factors such as the policyholder’s health, age and Mortality rate (life expectancy).
Types of Term Insurance Policies in the industry today –
1. Level Term:
The most common and simplest form of all the term insurance plans is the level term, where the sum assured remains the same during the entire term of the policy. In case of death of the insured during the policy term, the nominee receives the benefits.
2. Increasing Term:
Increasing term plans are of two types:
a. Plans which auto increase by a percentage every year
b. Plans which increase on certain key events like marriage, new home, child birth etc.
3. Mortgage or Decreasing Term:
This plan is suitable for policyholders who have taken mortgage or personal loans. Thus, policyholders can lower the sum assured basis the outstanding loan.
Important Features of Term Insurance Policy
Term plans are affordable
Pure term plans are mostly affordable as compared to other insurance plans. These plans offer life cover for the sum assured for a specified period of time, known as the policy term. In the event of death of the insured during the policy period, the insurance company provides the death benefit to the nominee or beneficiary. However, considering term insurance plans have no savings component, there is no maturity benefit that is payable to the insured after the expiration of the policy term. However, some term plans come with return of premium option.
The premium paid by the policyholder only includes mortality charges, along with basic administration cost for the policy issuance. Thus, term plans are cheaper as compared to other life insurance products, such as ULIPs or money back plans. Their affordability, and the protection they provide to the policyholder makes them an attractive option for individuals and families.
It is easy to purchase term life insurance policy:
The prospective life assured has to decide the amount of sum assured, depending on their financial objectives, loans or debts etc. Furthermore, various online calculators also help to figure out the ideal sum assured. A term plan can be bought in two ways.
1. Offline:
Individuals can approach an intermediary, such as a broker or an agent to buy term insurance offline.
2. Online:
Online term plans can be bought directly from the website of the insurance company or through web aggregators website. Furthermore, buying term insurance online is cheaper than buying them offline, as the insurance company saves on the commissions paid to the intermediary.
Term plans with return on premiums:
While pure term plans do not offer maturity benefits, and only provide insurance coverage for the policy term, there is an option, known as term plan with return of premium. This plan offers maturity value, which is return of all premiums paid, provided the policyholder survives the term. Considering the fact that this plan provides both death and maturity benefits, these are comparatively more expensive than the basic term insurance plans.
Rebates:
Rebates are offered by life insurance companies for choosing a higher sum assured. Furthermore, for females and non-smokers, special discounted premium rates/rebates are also offered by the insurance companies.
Term Insurance Benefits
Term policies have several advantages and benefits, which makes them an attractive option for those looking to buy insurance cover. These include:
• Simplicity:
Unlike plans such as endowment plans and ULIPs which combine insurance cover with savings or investment components, term insurance plans are easy to understand. Term life insurance policies are simple and easy to understand, where the life assured has to pay the premium, and get insurance cover for the term they choose.
• Tax Benefit:
Under Section 80C of the Income Tax Act, 1961, the premium paid for term life insurance is eligible for deduction. Furthermore, maturity benefit, death benefit and surrender benefit are eligible for tax benefits as per Section 10 (10D) of the Income Tax Act 1961. The above deductions and exemptions are subject to the provisions stated in the Income Tax Act 1961.
• Competitive Pricing:
Life assured can easily compare term insurance plans with respect to their price, thus creating a competitive market for term policies.
• Low Premiums:
The premiums paid for term life insurance plans are significantly lower than the premiums paid for other kinds of life insurance plans, as it doesn’t involve a savings or investment component.
Conclusion
It is important for individuals to secure their life, and the lives of their spouse and children. Term policies enable families to meet their financial goals, or pay off liabilities in the event of the demise of the insured.
Citations:
[1] https://www.unfpa.org/sites/default/files/pub-pdf/EN-SWOP14-Report_FINAL-web.pdf
[2] https://www.ibef.org/industry/insurance-presentation
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