Securing the future of your loved ones is undoubtedly on your priority list. While there are many ways to go about doing this, purchasing life insurance is one of the preferred ways to ensure that even in your absence, your family has the financial resources necessary to carry on and keep up with their life goals. Now, if you’ve have ever looked around for life insurance plans and compared the policies from different life insurance service providers, you would have no doubt come across term insurance plans.
You may have even heard a great deal about the term insurance benefits you get to enjoy by buying a term plan. However, if you are still not sure what exactly this kind of insurance is, and why it is more affordable than other types of life insurance, this guide can help you out. Let’s begin by trying to understand the answer to the most fundamental question - what is term insurance?
Term insurance meaning: What is term insurance?
Term insurance is the purest form of life insurance. As the name makes it quite evident, the life cover offered by the term insurance plan is valid for a specific period, which is the policy’s tenure. In return for the coverage provided, the insurer charges a nominal amount from the policyholder. This is the term insurance premium.
In the unfortunate event of the policyholder’s/life assured’s demise during the tenure of the plan, the insurance company pays the term insurance benefits or death benefits to the nominees of the policyholder/life assured.
How does term insurance work?
So, now you know the answer to the basic question - what is term insurance? However, to get a clearer idea of what this kind of life cover is all about, it is necessary to understand how term insurance works. What better way than to take an example to understand the workings of a term plan?
Let us assume that a policyholder is interested in purchasing a high life cover for his family, in return for affordable premiums. In that case, a term plan is one of the preferred choices. Therefore, he purchases a life cover for himself of, say Rs. 1 crore for a period of, say 20 years. The insurance company charges him a term insurance premium as the cost for this life cover. He continues to pay this premium each year, over the tenure of the plan.
● Now, in case the policyholder passes away during the tenure of the policy of 20 years, then, the insurer will pay the nominees a sum of Rs. 1 crore as death benefit.
● In case the policyholder survives the policy term of 20 years, then no benefits will be paid out to the nominees.
This is how term insurance works. One of the key defining features of term insurance is that it comes with affordable premiums. Let us see why this is so.
Why does term insurance have low premiums?
There could be many different reasons for term plans having low term insurance premiums attached to them. Here is a closer look at some such reasons.
● Pure life cover
This is universally one of the key reasons term plans have low premiums. Since they are pure life covers, they offer death benefits only. The sum assured is paid out to the nominees only in case of the policyholder’s/ life assured’s demise during the tenure of the policy, as we saw in the example earlier. Therefore, the costs associated with term plans are affordable.
● Online purchases
Purchasing a term plan online can also result in lower premiums, primarily because it reduces the costs associated with distribution and other aspects. The benefits of these cost savings are directly passed on to the customers mostly in the form of lower premiums.
● Purchase at an early age
The younger you are when you purchase a term plan, the higher the chances that your term insurance premium may be more affordable. This is because the risk of the insurable event i.e. demise of the policyholder happening when they are younger is relatively lower.
● Healthy lifestyle
A healthy lifestyle can also be another reason for your term insurance premium being lower. For instance, a smoker may be charged a higher premium than a non-smoker may, simply because the mortality risk for a smoker is higher.
Things to keep in mind while buying a low premium term plan
Before you buy a low premium term plan, make sure you factor in these elements, so you can purchase a cover that is adequate -
● The needs and life goals that your family members have, so you can get a cover that is sufficient to cover them in your absence
● The debts and liabilities in your name, so the term plan’s benefits are sufficient to cover these, thereby eliminating any financial burden on your family
● The insurer’s claim settlement ratio, which is better if it’s higher, since it means that the chances of your nominees’ claim being settled are higher
● Inflation, so you can determine the right amount of coverage needed to protect your family’s future years from now, when they will need a higher amount to sustain their current lifestyle
If you’re looking for a life cover that is high enough without having to tighten your purse strings too much, a term plan can be the preferred option. With low premiums coupled with other term insurance benefits like tax savings, there is a lot you can gain by opting for a term plan.