Term insurance is a relatively new form of insurance in India. Maybe that is why it is also perhaps the most misunderstood. For example, people often think that term insurance also has an investment component to it, like in the case of Unit Linked Insurance Plans ULIPs. However, term insurance is a pure-play insurance offering, whereby the policyholder pays the premium and if he expires during the term of coverage, the beneficiary receives the sum assured. However, there is no payout on maturity if the policy holder survives the term of coverage.
Here are some of the other most common questions that come to mind when we think about term insurance.
What is the term of insurance and how much cover should I take?
Term insurance plans are generally for as little at 5 years and can go up to 30 years. Term plans can be purchased by people even up to 60-65 years of age, and the plan generally offers coverage till the age of 75 years.
The premiums are relatively lesser than traditional life insurance plans, making them ideal picks for those who have just joined the workforce.
Ideally, you should take have an insurance cover that is 8-10 times your annual income. So, if your annual income is Rs 10 lakh, your cover should be Rs 80 lakh-1 crore.
Does the premium remain the same throughout the term of policy?
Generally, premium payments of a policy remain the same during the tenure of the policy if things are unchanged with the policyholder. However, if the policyholder develops an ailment or takes to smoking or drinking, certain loading will apply upon declaration of such a development to the insurer. While such a development will push up the price of the premium as the holder will fall into another risk pool, it is essential to make such a declaration so as to ensure that the beneficiary is not denied a claim for misstating of information.
On maturity, can a fresh policy be availed at the rate of the old premium?
No. Once the term insurance matures and the policyholder wishes to renew coverage, he has to take a fresh policy. As he would have aged from the time of the first policy, he might have developed ailments or the risk to develop them, which will increase the factor of risk associated and push up the premiums.
Death under which circumstances is covered in the policy?
Term insurance covers death under any circumstances ranging from accidental death, natural death or death due to illness. Term plans also cover death occurring outside the country. However, the insurer needs to be updated about the change in the country of residence of the holder.
Term plans generally purely cover life, but they can be teamed with insurance riders like accidental death benefit, permanent disability and critical illness, which increase the ambit of coverage offered by the plan.
However, death due to terrorist activities and death caused by natural disasters like earthquakes and tsunamis are usually not covered by term insurers. In case death of a policyholder occurs under such a circumstance, the beneficiary may approach the Insurance Regulatory and Development Authority (IRDA) to consider the issue on humanitarian grounds.
Also, insurers undertake serious investigations if the death of the policyholder occurs within two years of taking the policy.
What if I do not want the cover once I have taken it?
Term insurance plans generally come with a free-look period. This means that once you buy a policy, you have a 15-day window to get into the fine-print of the policy and check every minute detail. You can choose to change certain terms or opt out of the policy altogether during this period.