What are the Advantages and Limitations of Term Life Insurance Plan?

When compared to any other types of life insurance plans, term life insurance plans have advantages and limitations as well. In this article, let us begin with understanding the key advantages of a term insurance plan.

Advantages of a Term Life Insurance Plan

• Simplicity: When compared to any other life insurance plan, a term insurance plan is much easier to understand. All you need to do is pay the term insurance premium and avail the cover for the term chosen.

• Flexibility: Opting out of the term plan is easier when compared to getting out of the cash value policies. In case when you stop paying the term insurance premium the risk cover is ceased and the policy ends. With this, nothing will be payable as in the policy there are no elements of savings. On the other hand, with cash value policies complete survival benefit is given when they are held for the complete policy term. When you stop paying the premium mid-term then it means that there is a loss of finances and you cannot recoup the savings portion of the plan without specific deductions. The term life policies are often referred to as the renewable’ and ‘convertible’. Well, the former ensures that you could go in for the other policy and with no medical examination towards the end of the initial policy term. The latter permits you to convert the term life plan into an endowment plan for the equivalent sum assured with the associated increase in the premium would also make sense during the policy term.

• Low Premium: When compared to comparative cash value policies the term insurance premium is low. For instance, when a 30-years old individual buys the level term plan of 20 years for a Rs 10, 00,000 sum assured wherein the annual premium is Rs 3,000. Now with an endowment plan without profits, the equivalent death benefit, the premium will be above Rs 30,000 yearly and for the endowment plan with-profits, the annual premium would be around Rs 50,000.

• Competitive Pricing: The term insurance plans can be compared with other plans on the premise of price because they are structurally similar and easy to understand. Now, this has led to a competitive market wherein the term life policies are becoming a commodity rapidly. The buyers do not undergo information problem when it comes to a term insurance plan and therefore, renders the term market price-competitive than the cash value policies.

• Tax Benefit: It is generally argued when you buy an endowment kind of insurance the premium is more and you get benefit within Section 80C while investing. When a claim maturity is paid, it yields tax-free income. The term insurance premium is also entitled to tax benefit within the Section 80C. The difference in the premium between the endowment and term insurance plan could also be invested in the tax-efficient schemes such as the ELSS, PPF that also offers the front and rear end tax breaks that is similar to those when offered by the endowment plan.

Note: The tax benefit is subject to change as per the prevailing tax laws.

Now, let us discuss the limitations of the term insurance plan.

Limitations of the Term Insurance Plan

The following are the limitations of the term insurance plan:

• The term insurance premium increases with the advancing age and the insurance needs at the high ages mostly cannot be met economically with the term insurance.

• People who fall into the old age bracket of 65 years or more, it is difficult for them to buy the term insurance plan because the insurance companies do not offer the same beyond these ages. In case the term insurance company offers the same at such an age then it comes around with various conditions and cons are attached to the plan.

• The term insurance plans will not be of much help in case you wish to save for specific needs such as the marriage, education of the child, and so on.

• It will not be of much help if you are looking forward to the capital needs of the family or provide for income when you are alive.

• With a term insurance plan, wealth creation is not possible.

• No surrender value is accessible within a term insurance plan.

• At any point in time, you become uninsurable due to health or any other reason then a new term plan or renewal of the existing term plan will not be accessible.

The Bottom Line

When you are tight on the budget, a term insurance plan is any day a better alternative as the cash value insurance is on an expensive side. A term plan is best suitable for those with low income; however, require a large cover to secure the financial future of the family. A term plan is a must buy if you are the breadwinner of the family.

In case you have any liability such as a house or car loan, and so forth, a term insurance plan is suitable and should be included in the financial portfolio.