Purpose of Term Life Insurance
Here is some beneficial information for all those who wish to know about term life insurance meaning, purpose, and benefits. Individuals can opt for a term life insurance plan or policy for the following purposes:
- To take care of one’s family – The lump-sum pay-out offered by a term insurance plan to the policyholder's family can be used to clear various liabilities like loan repayment. It can also be used to meet their regular expenses and long-term goals in case of their sudden death due to unforeseen circumstances.
- To get peace of mind - If the person is the family's sole breadwinner, getting a term insurance plan assures them of the financial security of their loved ones' future even in their absence.
Benefits of Term Life Insurance
Individuals can avail of several benefits by opting for a term life insurance such as:
- Affordable Premium Costs: The entire premium paid towards a term insurance policy covers the risk of unexpected losses. This means there is no investment component involved in it. A policyholder does not receive any form of pay-out if he/she survives the policy term. As they lack the investment component, term insurance plans come at significantly lower premiums than a whole Life Insurance policy, which comes with a maturity benefit.
- High Life Coverage for Long-Term: Term insurance policies offer a higher coverage amount for a long term of up to 99 years of age at extremely low premiums. For example, one can avail of a coverage amount of INR 1 crore at premium rates starting at just INR 411 per month.
- Flexible-Premium Payment Options: Policyholders can choose their preferred frequency (once or at regular intervals throughout the policy term or for a limited period) and mode of premium payment from the various options provided by the insurer.
- Tax Benefits: The premiums paid towards term life insurance policies are deductible from taxable income up to a maximum of INR 1.5 lakh under Section 80C of the Income Tax Act, 1961. Furthermore, the death benefit received by the nominee is also tax-exempt as per Section 10(10D).
- Flexible Payout Options: Policyholders can choose whether the chosen sum assured is paid to their nominee in the form of lump-sum, equal monthly income payments, or a combination of both.
- Add-on Protection: Policyholders can buy a term insurance rider to get an additional cover over the base plan, as per their needs. The different rider options available are terminal or critical illness rider, accidental death rider, and permanent disability rider.
Factors Affecting Term Life Insurance Premiums
The premium for a term life insurance plan differs from individual to individual and is calculated based on various aspects of one's health and lifestyle, including:
- Age: As the risk of health concerns increases with age, lower insurance premium rates are offered to younger individuals (starting from 18 years of age). It tends to increase as a person ages. Therefore, experts advise investing in a term life insurance plan as early as possible to make the most of it. It would provide them with affordable premium rates and save a lot of money in the long run.
- Medical History of Family Members: In cases where the insured's family has a history of medical conditions like cancer or heart problems, the insured is also at a higher risk of developing such diseases. Therefore, a higher premium is charged.
- Current Health Condition: A person suffering from certain pre-existing illnesses such as obesity which increases the risk of future ailments, is offered at a comparatively higher premium rate than a physically fit person.
- Smoking or Alcohol Consumption: Habits that can affect one’s health negatively like smoking, drinking alcohol, consuming tobacco, or drugs attract higher term life insurance premium rates. These habits can increase an individual’s chance of falling sick or suffering from a life-threatening medical condition. Therefore, individuals following a healthy way of life require to pay a comparatively lower premium.
- Gender: Several studies have shown that women tend to live longer lives than men. An average woman is estimated to live five years more than an average man, translating to five years of extra premiums. Therefore, women are offered lower term life insurance premiums than men.
- Profession: An individual's profession plays a significant role in determining his/her health. Due to the demanding nature of risky jobs such as pilots, sailors, soldiers, etc., individuals engaged in such jobs are more susceptible to danger and likely to suffer from serious ailments. Therefore, if an individual's profession involves an increased risk like exposure to chemicals, environmental hazards, etc., they must pay a high life insurance premium.
- Duration of the Insurance Plan: A small term insurance plan comes at lower premium rates than long-term plans wherein the insurer has to provide cover for a longer time, indicating higher risk.
- Lifestyle Habits: Individuals inclined towards adventure sports activities that put their lives at risk are asked for a higher life insurance premium. Such activities include skydiving, mountain climbing, deep-sea diving, etc.
Things to Consider Before Choosing a Term Life Insurance Plan
Before buying a term life insurance plan, policy seekers usually get confused about the best available plan in the market and the parameters to consider while comparing the available plans. Some factors which can help them select the best policy provided by different insurance providers are as follows:
- Reliability of the Insurance Company: The reputation and stability of an insurance provider is a key factor to determine its trustworthiness. One can check the credibility of an institution by reading customer reviews for the products offered by it.
- Amount of Cover Required: One can calculate the coverage amount he/she requires from a term life insurance plan by subtracting his/her liquid assets from his/her long-term financial obligations.
- Premium Amount: One should compare the premium rates of all available term plans and choose a plan that offers a high coverage amount at affordable premium rates. The coverage amount available against a specific premium also depends on one’s age and health.
- Claim Settlement Ratio (CSR): The CSR is the ratio between the life insurance claims paid to the claims received by the insurance provider in a financial year. A higher and consistent CSR ratio of around 90% indicates that the insurer has a quick and robust claim settlement process.
- Solvency Ratio: The solvency ratio of an insurer helps the policy seeker determine whether the chosen insurer will be financially capable of settling their claim if required. As per IRDAI, all life insurers should maintain a solvency ratio of at least 1.5.
- Terms and Conditions: Life insurance seekers should make sure to read the terms and conditions written in fine print on their term insurance policy. It provides information on special cases where the death benefit cover is not provided, like when the policyholder dies due to self-harm. Knowing this information helps them understand the inclusions and exclusions of the term life insurance policy they are considering as a long-term investment.
Investing in term life insurance is a smart way to secure the financial well-being of one's near and dear ones in case of unfortunate events that may deprive them of the policyholder's protective presence. Moreover, they can avail of it at affordable premium rates and choose to make the premium payment monthly, half-yearly, or annually.