However, there are various common queries that insurance seekers can have regarding how term insurance works, what is policy term and how to determine a term that is suitable for your needs. To put such doubts to rest, let us take a deeper look at these topics and help you find the suitable term insurance plan.
How Term Insurance Works
Before availing a term plan, it is essential to know exactly how term insurance works so that its benefits can be better understood. When you avail term insurance, it essentially provides you with life insurance coverage for a specific period or ‘term’. In the event of your unfortunate demise during this term, death benefit will be paid out to your nominee(s).
As term insurance generally does not have maturity benefits, the premiums paid towards term plans are lower and more affordable than other forms of insurance. Based on your priorities, you can also select your type of term insurance plan. For example, you can choose an increasing term insurance to increase your life cover during specific events in life or you can opt for a return of premium term plan that offers your premiums amounts back at maturity.
What is Policy Term?
Before buying a term plan, it is important to know more about the topic of "policy term". If you find yourself wondering- "What is policy term?" it is simply means the lifetime of the term insurance policy. It is essentially the period for which a term insurance policy remains active and in case the insured passes away during this term, his or her nominee(s) will be eligible to receive the predetermined death benefit.
Difference Between Policy Term and Premium Paying Term
While the meaning of "policy term" is quite straightforward, it is often gets confused with another related term " premium paying term". Both of these terms refer to time periods and are closely associated but there is a marked difference between them and thus, should not be used interchangeably.
Policy term refers to the period for which your term insurance policy will remain active. This term is determined at the time of purchasing the insurance plan. It is used to refer to the period during which the life insured is provided coverage by the insurer.
However, premium-paying term refers to an altogether different concept. It refers to the period during which the policyholder is required to pay the premiums for the term insurance plan. In most cases, the premium paying term is equal to the policy term, which is why the two terms are often confused. However, some insurers allow the premium paying term for a term plan to be shorter than the policy term.
For example, if you purchase a term insurance plan to provide coverage for 40 years, the policy term will be 40 years. However, your insurer might allow you to pay off the premiums for your term plan over a period of 20 years. Hence, in such case your premium paying term will be just 20 years.
How to Determine the suitable Policy Term for Yourself
Term insurance plans are flexible products and can be suited to meet the needs of a number of individuals. That is why when you compare policy term, it is ideal to first determine the period for which you would want to avail term insurance. Here are a few factors to consider:
• Age
If you are young and just entering the professional world, it might be a preferred time to avail term insurance. Even though you may not have any liabilities or dependents right now, you are at an age where you can easily choose a policy term to provide you with term insurance coverage until retirement.
• Liabilities and Dependents
As you grow older, it is expected to have more liabilities, dependents and other financial responsibilities in your life. You might even be the sole earner in your family and have the future needs of your spouse and children to consider. Therefore, it is advisable to avail a policy term that can at least cover a period in the near future or until your responsibilities effectively reduce over time.
• Life Goals
You can also opt for a policy term that aligns with the major, long-term goals in your life. For instance, if you are looking to ensure that your children are educated and married in the next 10-15 years, you can make sure that you have coverage until that time. The main objective of term insurance is to make sure that your family achieves their life goals without any financial burden or hurdles along the way.
Conclusion
While it is essential to find the right insurer and the suitable term insurance plan, it is just as important to have a clear idea of the appropriate policy term for you and your nominee(s). In order to make the most of your term insurance plan, make sure that your policy term is well aligned with your age, liabilities and life goals.
FAQs
1. How to Choose Your Policy Term?
The choice of a policy term usually depends on your financial goals and their horizon. It is better to first decide a goal for which you want to buy the life insurance policy. Then, depending on when you would need the funds for fulfilling the goal, you can choose the policy term.
For instance, if you have a child aged 5 years and you want to plan for your child’s higher education, you can choose a term of 10 to 12 years. On the other hand, if your child is just one, you can choose a term of 15 to 20 years.
2. What is Policy Term?
Policy term is the duration over which coverage is allowed under the life insurance policy.
3. What is a suitable policy term?
There is no fixed number for a suitable policy term. The choice depends on your financial goals. The suitable term should be such that it creates a financial corpus for your life goal and gives the corpus when you need it. However, in the case of protection-oriented plans, like term insurance plans, you can opt for a tenure depending upon the duration for which you need a financial backup for your dependents, in your absence.
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