How Does A Term Life Insurance Work?

Death is inevitable for every one of us. While death may not be in our control, what we surely can control is how well we prepare to secure our family financially. In this regard, it is pivotal to have an insurance cover. While there are many types of insurance policies to suit the different needs of the people, a term insurance policy is a simple and affordable way to protect your family.

term insurance is a type of life cover, which offer coverage for a pre-defined period or term. If the policyholder expires during this period, the nominee of the policy will receive the death benefit. No benefit will be paid to the policyholder if he/she survives the policy term. However, many term plans come with guaranteed renewal feature, which allows the policyholders to extend the policy term.

Term insurance plans have minimum eligibility requirements. Most plans are available for people between the age of 18 to 65 years with the maximum maturity age being up to 85 years. The policy term can be from 5 years to 50 years and the sum assured can be from Rs. 20 lakhs to up to Rs. 1 crore and even higher.

Term life insurance is one of the best ways to protect people who are financially dependent on you from an unforeseen event, and at the same time, purchasing a policy is cost-efficient. The policy offers a substantial life cover at a small premium. However, the premium cost is based on the policy you buy.Here are some reasons why you need term insurance-

• The death benefit that term insurance offers to your family will help them cope with the financial demands in the future. They can finance their monthly expenses as well as pay for big events such as marriage or education.
• People usually purchase expensive properties such as home or cars by borrowing a loan. Failing to pay the loan, might result in the loss of property. If you pass away untimely, then you can secure your family against such heavy loans with a term insurance plan. Your family can pay the loans with the cover of the policy.

As time passes, the dependencies in our lives might increase too. Some have their spouse and children, and some have their parents to support financially. It is our responsibility to secure their future in the event of your untimely demise.Here are people who should purchase a term insurance plan-

• If you are a newly-married person, then you should protect your spouse’s future against an unforeseen event. It becomes more important if your spouse is financially dependent on you. A term insurance policy offers lifelong protection to your spouse.
• One of the most important reasons to buy a term insurance policy is to secure your children’s future. If you are a parent, then you should consider buying it. A child can be the most important responsibility in a person’s life. Term insurance will offer your children financial protection if you meet with an unforeseen event such as death.
• Taxpayers should purchase term insurance policy as it offers tax benefits. The premiums of a term insurance plan are tax deductibles under Section 80C. The payouts on maturity are completely exempted from taxes under Section 10(10D). A policyholder can protect their family’s future as well as save money on taxes.
• It is recommended to buy a term insurance policy as early as possible in life. People who have started their career should consider purchasing a policy as the premium cost is cheap for young buyers. The premium cost will not change once a person buys a policy. However, people who don’t buy it early on will have to pay expensive premiums as they get older.
• Retired people should financially secure the lives of their dependents.

Also Read: What is Term Insurance? Meaning, Benefits & Its Working

• One of the important advantages of term insurance plan is its substantial coverage. The policy offers a large life insurance cover. A policyholder doesn’t even have to pay big for premiums as they are cheap.
• Some insurance policies provide protection against total and partial disabilities.
• You can choose to add riders such as cover against critical illness and accidental death to increase the security.
• A policyholder can even get tax benefits with term insurance policy under Section 80C. Also, there are tax benefits on the cover that a policyholder’s family receives in case of an unforeseen event.

It is vital to compare term insurance plans before you purchase a policy. There are things that you should consider while you compare policies.Here are the factors-

• Solvency ratio suggests if the insurer can settle the policyholder’s claim. IRDAI has made it necessary for the insurers to maintain a solvency ratio of 1.5 as it indicates their financial potential to settle claims.
• Another factor that a policyholder should consider is the claim settlement ratio of the insurer. The ratio conveys how many claims the insurer has approved against the claims made by the policyholders. Look for an insurer with a substantial claim settlement ratio.

Yes, many insurance providers now offer riders or add-ons with term plans. Some of the most popular riders are Accidental Death and Disability, Critical Illness, Surgical Care, and Hospital Care. While the riders do increase the premium nominally, they can considerably enhance the policy coverage to offer added protection.

Yes, under Section 80C of the IT Act, premiums paid towards a term insurance plan are eligible for tax deductions of up to Rs. 1.5 lakhs in a financial year. You can get this tax deduction not just when you pay the insurance premiums for yourself but also your spouse or children.However, make sure that you don't pick term insurance as a last-minute tax-saving investment. Calculate your insurance needs carefully and select a coverage amount that you feel should be adequate for your family to manage their expenses for a considerable duration in case of your demise.

The low premiums and larger coverage make term insurance plans a must for everyone, especially if you are the sole breadwinner of the family. Go through the policy details carefully before selecting to make sure that you pick a policy that perfectly meets your requirements.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.