Term life insurance provides a financial safety net for the future of your loved ones in your absence and protects them from financial hardship in case of your untimely demise. When you are young and may or may not have a spouse and children to worry about, at such a time, a sum adequate to cover your liabilities, and perhaps provide additional old-age security to your parents would be enough. However, with age, responsibilities increase tenfold and at such a time, term insurance would come in handy so as to not burden your family to make two ends meet or alter their manner of living. Term life insurance also is known as a life insurance term plan, is a popular part of long-term financial planning. But to effectively use this tool in our financial portfolio we need to understand the nitty gritty of it.
UNDERSTANDING TERM LIFE INSURANCE
What is term life insurance?
Simply put Term insurance is a form of life insurance that covers you for a fixed period of time. It’s called “term” meaning the policy lasts a set amount of time and then expires, after which you will no longer be covered by it. You’ll have to buy a new policy or make sure your current one is renewable before it expires if you want to remain covered after the initial term. Term periods typically range from one year to 30 years, with 20 years being the most common term.
The life insurance term plan is designed to protect your dependents in case you die prematurely. If you have a term policy and die within the term, your beneficiaries receive the payout. These plans are easy to understand and provide financial protection that your family will need if you are no longer around. They give peace of mind to you by ensuring that your family is financially secure and independent.
Term life insurance is often considered the “simplest” form of life insurance and is best suited for providing coverage or income for a short term and on a limited budget.
Why should I buy term life insurance?
Generally speaking, term life insurance is purchased to replace your income if you die, so your loved ones can pay debts and living costs. For example, if you and your spouse own a home and you were to pass away tomorrow, your spouse would have to pay the EMI’s on their own but If you have a proper term life insurance policy, your spouse will receive enough money from the policy’s death benefit to pay off – or at least keep up with the payments. Term life insurance is considered one of the more inexpensive ways to secure a death benefit even with a tight budget as term insurance plans provide a high life insurance amount at inexpensive premiums.
You can get a chronic illness cover. Besides protecting your family in your absence, you can get a lump sum payout on the first diagnosis of a critical illness like heart attack, cancer, etc.
You can get additional protection by attaching accidental death benefit to your term plan. With this benefit, your family will get a larger payout in case of your unfortunate demise due to an accident.
These plans offer tax-deductible benefits for term life insurance premiums paid under Section 80C. You also get tax benefits under Section10D on the money that your family receives in case of an unfortunate event.
Term life is popular with young families who need protection but also need to keep prices low. It is often intended for income-replacement needs.
What is covered in term life insurance and how it works?
A term life insurance policy covers the policyholder up to the age specified in the contract. Should a policyholder die before the term is over, a beneficiary which may receive a payout benefit. Term life insurance is renewable for a premium at the end of a given term if the policyholder’s life should exceed the term.
Term life insurance is less expensive than whole life insurance because it does not build up any equity. You are fully covered during the term of the policy but you do not receive cash back when the term is over.
When you get a term life insurance from someone like Shriram Life it will pay your beneficiaries a set amount if you die during the policy’s term. In exchange, you pay a monthly premium to the company for the duration of that term.
However, since you cannot change the amount of coverage within a term policy and you realise that the amount isn’t sufficient, you would need to buy an additional term life insurance for more coverage. If you outlive your policy term, the insurance terminates and you must buy another policy if you still want to carry life insurance. However, the premium for another policy could increase because your older age and any health conditions will be taken into account. That’s why it’s important to choose a suitable term length early in life.
When the term ends…
Sure you have contemplated what happens if you buy a term policy only to realize at the end of the term that you still have a need for life insurance? Well, its good news and bad news here. The good news is that many policies will give you the option to renew your policy when you reach the end of the term. The bad news is that you’ll probably face much higher costs since age is one of the key factors used to determine premiums for life insurance term plans. For renewal of policy if your health has deteriorated you may find that it’s too expensive to renew your policy or you may not even re-qualify. So if you’re considering a term policy, make sure you carefully consider how long you’ll need the coverage. If you’re pretty sure that your needs are temporary, then term insurance is probably the right choice for you. But if you think there’s a possibility that you might need the coverage for a long time, then remember that if you want to renew your term policy after it expires or buy a new term policy at that time, your age, health status or other factors may make coverage very expensive.
Life insurance vs Term insurance – Pros and Cons
Conflicted whether to purchase whole life or term life insurance is a personal decision that should be based on the financial needs of your beneficiaries as well as your own financial goals.
Some of the features of short term life insurance are that it provides death benefits only and Pays benefits only if you die while the term of the policy is in effect. However, it is the easiest and most affordable life insurance to buy. Term life is purchased for a specific time period like 5, 10, 15, or 30 years and becomes more expensive as you age, especially after age 50. The term must be renewed if you want coverage to be extended beyond the term length. This insurance can be used as temporary additional coverage with a permanent life insurance policy.
Some of the Features of long term life insurance are that it covers you for life. It provides natural death benefits as well as a cash value accumulation that builds during the life of the policy. You must qualify with a health examination to purchase whole life insurance, it may be purchased with no medical exam but at a higher cost. This insurance takes 12 to 15 years to build up a decent cash value. This is a good tool for estate planning. Cash value is based on how much the return on investment is worth and a portion of the cash value can be borrowed during the life of the policy.
Now that you have a better picture of the difference between term and whole life policies, you probably want to compare term life versus whole life insurance costs. To do so, you will need to directly compare the short and long term costs of whole life policy and a term policy, based on factors like your age, the face value of the policy you are looking to buy, and whether or not you are a smoker. You may find that your out-of-pocket costs for whole life insurance seem daunting compared to term life insurance. This is because the money you pay into term life insurance premiums are an inexpensive way there to provide a death benefit to your beneficiaries if you die during a specified term, while money you invest in whole life insurance premiums builds cash value that you can use later in life or that will add to the death benefit payout.
Whether term life or whole life depends on your situation. Below are the key pointers of what you expect from your insurance and which path to follow…
|Term life insurance||Whole life insurance|
|Want a lower premium||Can afford a higher premium|
|Want a shorter commitment||Want no expiration date|
|Won’t have many expenses at the end of the term||Want money left to beneficiaries|
|Not concerned about building cash value||Want to build cash value|
|Want a high amount of coverage||Want a relatively conservative investment account|
Should You Buy Both Whole Life and Term Life?
You can own both whole life and term life policies at the same time. People who are looking at this option typically already have a whole life policy. However, they may find that they want additional short-term insurance coverage such as for 10 years. In this instance, buying a term policy for the amount of life insurance you need for that extra protection can be a good solution.
You may already own a term policy and find that you want to invest some additional money into a long-term investment for retirement purposes, so buying a whole life policy which has a cash value accumulation feature may be also appropriate.
Key provisions included in some of the best term insurance plans
When considering a term purchase, one thing to keep in mind is that not all term policies are the same. Some may include certain provisions as standard features, while others may require you to pay extra to add these features (riders) to your policy. So if you’re comparing term policies, remember that price is not the only factor to consider. Other important benefits may include:
- Accelerated death benefits which allow a terminally ill person to collect a significant portion of his or her policy’s death benefit while that person is still alive.
- Disability riders which waive premiums when a policy owner suffers a long-term disability, typically one lasting six months or longer.
- Accidental death benefits that double or triples the benefit in the case of death by accidental means.
- Provision for convertibility that the term insurance contracts allows you to convert your term policy to a whole life policy. Being able to convert to a permanent policy is a great option to have in the event that circumstances in your life change such as failing health or maybe just the realization that coverage is needed for a longer period of time than you originally anticipated.
Shopping for term life insurance
If you are in the market for term life insurance then just following the tips given below will help you at successful portfolio planning.
- Figure out how much coverage you should have. A term life policy should take into account your immediate after death costs, loans, income, debt and education. This will give you a clear estimate of the ideal amount of term life coverage.
- Choosing the length of the policy. Common terms include 10, 15, 20 and 30 years.
- Choosing the amount of the policy. This is the sum your beneficiaries will receive in the event of your natural death. The amount you choose should depend on a number of factors, including your income, debts and the number of people who depend on you financially. No amount is large or small while putting it in a term life policy.
- Medical examination. The exam typically covers your height, weight, blood pressure, medical history, and blood testing.
Initiation of policy. Once your policy is in place, maintaining it is a matter of paying your monthly premiums. From there, if you die while the policy is in force, your beneficiaries receive the face amount of the policy that is tax deductible.
Shriram Life Online Term Plan
To understand how a typical term life insurance works let’s take look at the features of the Online Term Plan by Shriram Life Insurance Company:
- Enhanced protection with 3 options that provide for a comprehensive cover
- Higher the sum assured you opt for lower is the premium
- Provides life cover up to 75 years
- Flexible premiums based on the choice of the benefit options
- Affordable premiums – as low as Rs. 7,343 p.a. for a cover of Rs 1 Crore
(T & C apply)
- Lower premium rates for women