Imagine a world where your family has to survive without you. Done? We can bet a dollar to a dime, the moment you imagined this, all you could think of was how would they survive emotionally and financially. What would their future look like without you in it?
Well, though tactless, we could say, that had you had a term insurance in place to financially replace you, the palpitations would have been a bit lower. You would know that despite being emotionally distraught over your absence, they would at least be financially protected.
Now, when we single out term insurance plans as being a solid channel to secure your future, financially, you may ask why term insurance? What makes it better than say, ULIPs, Endowment plans, etc? So, read on to know why!
What are the benefits of Term Insurance Policies?
1. Affordable access to significant coverage
If you are looking for an affordable option to gain access to a lump sum amount that will be disbursed to your family when you are not around, term insurance plans have to be the option.
Take a look at a few user cases that will help you acknowledge this better -
| Use Case | Annual Income | Age | Tenure | Coverage | Annual Premium |
|---|---|---|---|---|---|
| Sneha | ₹8 lakhs | 25 | 40 | ₹3 crore | ₹22k - ₹25k |
| Sahil | ₹12 lakhs | 30 | 35 | ₹2 crore | ₹21.5k - ₹27k |
| Sohini | ₹15 lakhs | 35 | 30 | ₹1 crore | ₹13k - ₹16k |
As you can see, a varied permutation and combination of income, coverage, and tenure still yields you affordable access to a high-end coverage amount.
2. Tax benefits
Term insurance plans offer you multiple tax benefits on their premiums. Here is a quick look at it -
| Income Tax Act | Capped Amount | Relevance |
|---|---|---|
| Section 80C | Up to ₹1.5 lakhs | On the premium paid towards term insurance policies. |
| Section 10(10D) | No cap | For any maturity or death benefits that the beneficiary receives from a term insurance plan. |
| Section 80D | Upto ₹1 lakh | For the premium on a Critical Illness Rider, if you have opted for it. |
3. Lock-in premiums at your purchase age
The age at which you purchase a policy influences the premium for your plan. The younger you are, the lower your premiums. And your premium gets locked in. This means that your premiums stay the same across the tenure of your plan.
So, let’s say -
(a) Mr. X buys a term insurance plan when he is 25 years old for a cover amount of ₹2 crore with a tenure of 40 years (till he reaches 65). His annual premium would be - ₹18k - ₹21k
(b) Mr. Y buys a term insurance plan when he is 35 years old for a cover amount of ₹2 crore with a tenure of 30 years (till he reaches 65). His annual premium would be - ₹27.5 - ₹33k
So, provided you make a smart choice, and opt for a term insurance plan at the earliest, you will have easy access to substantial funding at affordable charges for an extensive period. And subsequently, your family will stay financially protected for a long time.
4. Multiple death benefit payout options
When you purchase a term insurance plan, term insurers offer you two options while considering the payout-
- Lump sum - Upon the death of the policyholder, the entire cover amount is disbursed in one go. The family can then choose to split the amount and invest/save it for their future financial needs, as they see fit.
This is best for families that are confident in their ability to handle finances smartly. Then again, it’s always best to at least have access to the entire cover amount lest you are not exactly sure about your insurer.
- Staggered - When the policyholder passes away, the beneficiaries are paid their death benefits over instalments (the frequency is, as chosen by the insured). Such staggered disbursal of the cover amount helps deal with a family’s monthly expenses
(Please note: Some insurers also offer you a combination of both, where a share of the cover amount is paid out in lump sum and the rest is paid out over instalments.)
5. Flexibility in premium payments
Term insurance plans are customisable financial products that cater to diverse financial goals and potentials. Thus, term insurance providers offer multiple options as premium payment modes -
- Single - A single upfront payment for the entire plan. This is ridiculously expensive and often deprives you of the ability to add riders to your plans in the future.
- Regular - A monthly/quarterly/annual repayment of premiums that runs across the complete course of your plan’s tenure. So, if your plan has a tenure of 40 years, you will be paying your annual/quarterly/monthly premium for 40 years.
- Limited - An accrued payment of premiums across fixed intervals, that usually ends before the completion of the tenure. Term insurance providers offer you frequencies of 5, 7, 10, 12, or 15 years for the repayment.
Such flexibility helps you repay your premiums at your preferred pace and current financial stability.
6. Affordable customisation with an extensive list of riders
While vanilla term insurance policies are a great start, you can always customise the plan to tap into its maximum potential. All you need is to recognise the suitable riders. Here is a look at the most recommended ones -
(i) Critical Illness Rider - A valuable add-on that offers you a lump sum amount upon being diagnosed with a critical ailment. The amount received can be used at your discretion. The rider, in our opinion, is a must-have for all.
(ii)Waiver of Premium - A worthy rider that we always recommend because it extends you the perk of not needing to pay premiums in case you are left incapacitated, without a source of income. So, your family stays financially protected even if an accident/ailment leaves you struck to a wheelchair and without a job to pay the premiums.
(iii) Accidental Death Benefit - A great rider to have, in case you are a frequent traveler or work in a hazardous environment. The rider disburses a substantial amount that is over and above the base cover in case the policyholder dies in an accident.
(iv) Increasing Cover - This is a moderately okay rider to have, especially if you feel the initial cover amount calculation went wrong. For example, say you find that your cover will fall short considering the number of dependents & their life stage requirements. In this case, your coverage would need a steady year-on-year boost. However, be warned, such riders and plans that offer this provision are more expensive than your standard ones. We would say, you better approach an expert when calculating your cover amount and avoid this rider altogether.
(v) Decreasing Cover - It’s an okay rider to add to your plan, in case you are worried that your dependents may become financially independent earlier than expected. And since a larger cover means a higher premium, you might feel like you want to save the premiums and invest it elsewhere by opting for this rider. However, predicting financial obligations and taking a strong step to reduce the term cover means you need to be certain that under no circumstances will your family need that higher cover amount.
(vi) Lifestage Benefits - Say, your plans included having only one kid. However, plans change, and now you are planning to have another. This means you will need a higher cover when your other child arrives. This rider caters to such life-stage requirements by boosting your cover. In general, your term insurer is rigid and won’t allow any changes in your plan, but if you have this rider added to your plan, you can increase your coverage by a certain amount during any major life stage events.
(vii) Terminal Illness Rider - In case you are diagnosed with a terminal ailment and your doctor mentions in a written statement that you have a poor prognosis (with only a few months to live), with this rider in place, your insurer will disburse a large amount to be used at your discretion. The problem with this is, in India, not many doctors are ready to offer such a declaration. Hence, you miss out on tapping into the rider’s potential.
7. Return of Premium (ROP) option
Usually, term insurance plans only offer the cover amount to your beneficiaries in the event of your death. However, if you opt for the Return of Premium (ROP) option with your plan and survive the policy tenure, then you get a full return on your premiums (apart from the GST of course). However, please expect higher premiums for this feature as compared to the standard plans.
While some of the aforementioned riders add value to your base term plan, others are not worth much. However, all these riders customise your plan to best suit your financial needs.
Conclusions
Term insurance plans are crafted to be a financial protection tool that will replace the policyholder and his/her income in the event of death. While term insurers do have a long list of eligibility criteria, the policies do offer global, affordable, and comprehensive coverage and access to a high-end sum assured. If you can be smart about choosing the cover, tenure, and riders and pick a policy from any of the top insurers across the industry, a term insurance plan can be the ideal protection tool for your family.