1. What is term life insurance?
One of the simplest and purest forms of life insurance, term life insurance is designed with the intention to provide financial cover in the event of the untimely demise of the policyholder. By paying a predetermined premium for a specific policy tenure, the policyholder receives a death benefit that can go a long way to securing the financial stability of our loved ones when we are not around.
It is all about planning for the inevitable and ensuring that our loved ones and those closest to us are well looked after in our absence.
2.Understanding Term Insurance
Term insurance plans are one of the most popular forms of life insurance in the market right now. They provide a very high coverage to the policyholder at a relatively low price in comparison to other types of insurance plans. As there is no investment component, the entire premium goes towards covering the risk of the demise of the policyholder.
As a result, it is important to understand the terminology and vernacular used in it to gain a better idea of what the policy offers and entails:
This is the focal point of the policy and also where it gets its name from. The term, in this case, refers to the period of time that the coverage is provided to the policyholder. Usually, the term is 10, 20 or even 30 years with the option to extend depending on the insurance company that provides it.
The death benefit is the coverage that the policy provides. If the policyholder dies during the active term of the policy then the nominee or beneficiary is entitled to a lump sum death benefit that is paid by the insurance company.
This refers to the amount of money that is required to keep the policy active throughout the policy term. The premium amount is decided beforehand taking factors like age, health, income and life expectancy into account. It is usually due monthly but may vary for different insurance providers.
3.Who needs term life insurance?
Term life insurance offers many advantages due to its cost-effectiveness and affordable premiums but those terms change significantly and adversely if certain parameters are exceeded or not met. The term life insurance premium increases with advancing age and increases even more if there are underlying health issues or lifestyle choices that affect health like drinking and smoking excessively. As a result, the amount paid in premium becomes uneconomical and offers very little in return.
Investing in term life insurance is ideal for people who have families or loved ones like spouse, children, parents or even siblings that are financially dependent on them.
It should be noted that having financial dependants should not be the only reason to consider term life insurance. In the event of death, it can help the family financially by covering the funeral expenses or it can help pay off any outstanding debt if any.
Another demographic that frequently chooses to purchase term life insurance is young people. As the younger, you are the less the amount of premiums you have to pay. This is considerably better than permanent life insurance as the premium in it tends to be quite expensive right from the start.
One of the best ways to figure out if term life insurance is ideal for you is by using an online life insurance calculator. It takes into consideration factors such as age, health, annual income, family structure, financial dependants, any debt and various other factors to provide you with a recommendation tailored to your needs. It can also tell you if insurance coverage is needed at all.
4.Reasons to buy term life insurance
Term life insurance is one of the best ways to ensure that your family and loved ones are financially stable in case the worst happens to you.
There are many different term insurance policies that are available in both the private and public insurance company sectors that provide deals that are both profitable and suitable for your requirements.
These are 10 reasons why opting for term life insurance is a good idea:
a – It is affordable
As one of the most basic and simplest forms of insurance, term life insurance is designed to be affordable and is expected to fit well within the client’s budget while also offering a significant return in the form of the death benefit depending on the premiums invested.
b – The death benefits are tax-free
Almost all insurance policies including term life insurance allows for the death benefits to be exempt from any tax. This is due to the fact that the premiums that are to be paid during the course of the policy include the tax levied by the government. Although there are some instances where it might be filed under taxable income.
c – Built-in guarantees and option to opt-out
By purchasing a term life insurance policy, you enter into a legal contract with the insurance provider. As a result, the insurance company is legally obligated to make payments upon the maturity of the policy.
If for some reason, you are unhappy with the terms of the term life insurance policy during the policy term you can opt to change the policy type, the policyholder or even terminate the policy entirely without being liable for any penalty fees.
d – Cash leverage
Term life insurance policies usually offer high returns when the policy term is finished. This makes it a good way to leverage cash as the amount after maturity of the policy is a couple of times more than the total premiums invested.
e – Timely payouts
Amongst all the various types of life insurance policies, term life insurance has the fastest payout rate. This is due to the simplicity of the policy, as it leaves almost no room to debate for insurance, thus making them obliged to pay the total sum owed as soon as the claim is made.
f – Living Benefits
Most term life insurance policies carry some form of benefits other than the death benefit. The living benefit rider which is an add-on to the term life insurance policy allows access to funds under certain conditions during the policy term.
g – Easy access to insurance quotes
Due to the extremely competitive nature of the term life insurance industry, many insurance companies are offering a variety of plans and policies both online and offline. They usually also offer free policy quotes for prospective customers.
h – The exact amount of benefits received
After investing in a term life insurance policy you know the exact return that you will receive on your investment. If all premiums are paid on time and without fault, the amount that was initially promised to the policyholder will remain constant and unchanged throughout the policy term. This reduces the risk factor in terms of benefits considerably when compared to other forms of life insurance.
i – Take care of your health
Your health status is considered only during the time of applying for the term insurance policy and if anything that affects your health afterwards will be covered by the insurance policy.
j. – Convertibility
As mentioned above, existing term life insurance policies can be converted to other types of insurance policies during the policy term depending upon a change in the situation but there are certain penalties and restrictions like conversion cost, time period of policy and the amount that is to be converted, that will occur.
5.Who Will Benefit From Term Life Insurance?
As mentioned above, term life insurance provides beneficiaries with a lump sum death benefit if the policyholder dies during the duration of the policy term. This is not like traditional insurance policies that provide money back or market-linked life insurance policies but term life insurance policies offer much higher coverage for a lesser amount.
Here are some key benefits of opting for term life insurance:
- Pay off any outstanding debt you may leave behind
- Substitute for loss of income for the family and pay for living expenses like rent or mortgage
- Ensure that your children are well taken care of especially if you are a single parent
- Cover the burial cost, estate taxes or any other final expenses
- Fund college cost for children
- Pay off any unpaid medical bills or taxes
- Create a financial legacy for your loved ones in the form of an inheritance
6.Types of Term Insurance / Which type of term life cover should I get?
Most term insurance policies offer level premiums for the duration of the policy which is usually for 10, 20 or 30 years. These are commonly known as ‘level term’ policies.
There are three main types of term life insurance:
Level term insurance
A level term insurance policy is considered to be one of the simplest forms of term life insurance. In this type of policy, the terms never increase and the amount of death benefits stays the same throughout the entire term or duration of the policy. These terms are usually offered from five to thirty years, in five-year increments.
There are some insurance companies that offer single year policies that are renewed annually. These are still considered to be level term policies as the premium remains the same throughout the duration of the policy. However, since each term is only one year, there may be an increase in annual rates.
Increasing term insurance
In increasing term insurance policy, as the term of the policy continues the size of the payout increases. To put it in simple terms, the later into the term the policyholder passes away, the bigger the payout the beneficiary will receive.
The concept of increasing term life insurance is to combat the effects of inflation. This allows family members and loved ones who are financially dependent upon the policyholder to continue maintaining their lifestyle despite increasing overall expenses.
The cover is set to increase by a fixed amount each year or it is increased according to the retail prices index(RPI) measure of inflation. As a result of having the benefit of a guaranteed payout that will increase over the term, the premium will also increase proportionally as the cover rises.
Decreasing term insurance
In this type of term insurance, the payout received by the beneficiary decreases over the term of the policy. Sometimes referred to as mortgage protection insurance, this type of insurance is used to pay down the balance on any large outstanding debt that the policyholder might have incurred. As the debt obligation shrinks, so does the amount of coverage needed.
Contrary to perception, the premiums in this policy do not decrease with the benefit, instead of decreasing term insurance policies offer a much lower premium from the beginning and stay level throughout the duration of the policy. Despite this, decreasing term insurance policy is the cheapest of the three main types of term insurance.
7.Pros and Cons of Term Life insurance
Pros of Term Life Insurance Plan
As we know, term insurance plans offer life coverage and protection to the policyholder. Apart from these advantages, here are some key additional features:
a – Cost-effective:
As it is one of the cheapest and simplest forms of life insurance, term life insurance is also one of the most cost-effective forms of insurance. Policyholders can avail huge amounts of life coverage at a fraction of the premium cost. The premium rate of term life insurance is around six times lesser than the premium rate of other types of life insurance policies.
b – Simple:
Term life insurance policies are the simplest to understand and easiest to keep up to date with. Other insurance plans like endowment plans or money back plans are a combination of risk cover with savings, whereas in a term life insurance plan you simply just pay the premium and receive the life coverage for the term that you have opted for.
c – Flexibility:
Term life insurance offers flexibility in two key aspects of the plan namely ‘renewable’ and ‘convertible’. Policyholders can renew their plans without the need for any medical examination. Additionally, the insured can convert or change their existing term insurance policy to an endowment policy for the same existing sum assured with an increased premium amount.
Another aspect of flexibility that term insurance offers is the option to opt-out of the policy contract without any hassle. That means once the policyholder stops paying the premium amount due, the risk coverage provided by the policy ceases and the policy is terminated. The policyholder does not have to pay for any penalties nor do they have to worry about payouts like the ones offered in endowment plans, term life insurance policies only offer a death benefit and do not feature any savings component.
d – Tax Benefits
All term insurance policies that are offered by insurance companies offer a tax benefit to the policyholder. Even though the premium amount is less in term insurance, it is still eligible for tax benefit.
Cons of the Term Life Insurance Plan
One of the most tempting reasons to purchase term life insurance is that the premiums that are to be paid during the term are quite inexpensive but that does not mean the policy is without its fair share of limitations. Here are some key factors to consider before purchasing a term policy:
a – No return on investment
Term life insurance policies are not designed to increase cash value. The insured pays a fixed premium amount to the insurance company with the sole purpose of creating a death benefit and the amount invested cannot be accessed or used by the policyholder. This means that if the policyholder outlives the term of the policy they will not receive any kind of benefit.
b – The Age Factor
The amount of premium that is to be paid is calculated based on the age of the policyholder. This means that with increasing age the amount of premium that is to be paid also increases and as a result purchasing a term life insurance policy at an advanced age becomes uneconomical. Additionally, if the prospective policyholder is a senior citizen(above the age of 65), buying a term insurance plan becomes difficult as most insurance companies either do not offer term plans after a certain age or if they do, the plans come with stringent conditions that might be disadvantageous for the policyholder.
c – Not for savings or financial assistance
People who are looking to create savings for higher education, marriage or retirement planning should not opt for term life insurance as there is no savings benefit.
The term insurance policy is also not ideal for those who are looking to provide financial assistance to your family while you are alive. Additionally, the term insurance policy does not offer a surrender value or facilitates loans during the policy term.
d – Not for wealth creation
Term life insurance is not ideal for those looking for wealth creation. Also, they do not offer a hedge against inflation as there is no profit plan in place.
8.Where to buy Term Life Insurance
NRI Life insurance is the best place to buy life insurance online as it provides the best term insurance plans catered specifically to Indian citizens living abroad. We provide tailored plans that are ideal for your needs and guarantee the best coverage possible.