Term Insurance - The Core of Your Financial Planning

When it comes to financial planning, life insurance has its own importance as it safeguards the interests of your loved ones when you are no longer around. Among the several life insurance plans available in the market, term insurance perfectly fits in the scheme of things because of the multiple benefits it has on offer and the high level of protection quotient it brings to the table.

What is Term Insurance?

It is the simplest form of life insurance plan that provides a pay out to your nominee in case of your demise during the policy term. However, if you do survive the policy term, nothing is payable.

A pure term plan has no investment component, unlike other life insurance plans such as endowment policies and unit-linked insurance plans (ULIPs). The entire premium goes towards the protection component in a term plan. Thus, a term insurance plan helps secure your family’s future in your absence.

The primary objective of a term plan is to protect your loved ones against loss of income arising due to your sudden demise.

Psychology of an Indian When it Comes to Term Insurance

Now that you know what is term plan let’s understand the psychology of Indians when it comes to buying a term life plan. As a pure term plan offers no maturity benefits if the policyholder survives the policy period, it often acts as a deterrent in purchase. According to a survey conducted last year, term insurance penetration in urban India stood at a mere 28%.

This clearly highlights that Indians are still reluctant to buy a term insurance plan and add it to their portfolio. Take for example, the case of 25-year-old Ranjit working with a private firm in Mumbai. When he was advised to buy a term plan, his questions were:

Why should I buy a term plan as I am quite young now?

Why should I invest in an instrument that pays nothing in return?

In fact, many Indians ask the same questions as Ranjit and use them as an excuse not to buy term insurance. However, the COVID-19 pandemic has highlighted that life is uncertain, and anything can happen anytime. In such a scenario, and even otherwise, it’s prudent to secure the dependents of our family and loved ones, and you can easily do so with the help of a term life insurance plan.

5 Reasons Why You Should Add Term Life Insurance in Financial Planning 

1. Affordable Premiums

Term plan premiums are quite affordable. It is the cheapest form of life insurance available in the market. Premiums are low because there’s no investment component. With a term plan, you can get a cover as high as Rs. 1 crore by paying a premium of a few thousand rupees.

Also, premiums are constant throughout the policy term. The earlier you buy a plan; the lower are the premiums. Insurers have calculators on their websites that help you compute premiums.

2. Customisable as Per Life Goals

This is another significant benefit. You can customise a term plan based on your needs. For example, when you have dependents and a family, you can increase the coverage. On the other hand, when you are on the verge of accomplishing your goals, you can reduce the coverage. That’s not all.

You can also customise the pay-out option. Depending on your requirement, you can either choose a lump sum pay-out or a staggered payment option where a percentage of the sum insured is paid as a lump sum, while the remaining amount is paid monthly.

3. Options to Add Riders to Maximise Benefits

You can further customise a term insurance plan by adding relevant riders. Also known as add-ons, riders provide an extra pay-out up and above the sum insured mentioned in the base policy. Some common riders available are critical illness benefit, accidental death benefit, partial or total disability benefit and so on.

4. Tax Benefits

A term plan also helps you lower your tax liability. The premiums you pay qualify for tax exemption under section 80C of the Income Tax Act. Under this section, investments up to Rs. 1.5 lakhs are eligible for tax exemption. The pay-out received from a term plan is also eligible for deduction under section 10 (10D).

5. Financial Security to Your Family

This is perhaps the biggest benefit of a term insurance plan. It provides your family financial security in your absence and ensures they can meet day-to-day needs with utmost ease. It also helps repay any loans or liabilities that you may have and keeps crucial financial goals on track.

Right Age to Buy Term Insurance Plan

Now that you know what is term insurance and its associated benefits, the next question is what is the right age to buy a term plan? While there’s no right age to do so, it’s advisable to buy a term plan as early as possible. It’s in your best interest if you buy a plan as soon as you start earning.

This is because when you buy a policy early, you are likely to be in the pink of your health. This lowers the premium and also expedites the buying process. The premium of term life insurance increases with age, and so are the risks of developing lifestyle diseases. If you purchase a term plan later in life, you need to pay a higher premium, and the policy may come with strict terms and conditions.

So, it’s better if you buy a term plan when you are young and healthy. Compare different plans and buy the one that best fits your requirements.

Types of Term Insurance

The different types of term life insurance plans are: 

Level Term Plans

This is one of the most basic types of term insurance plans where the sum assured is same throughout the policy term. Your nominee gets the benefits in case something happens to you during this term. Also known as pure term policies, if you survive the term, nothing is payable.

Return of Premium Plans

In this type of term insurance plan, you get back all the premiums paid towards the plan if you survive the policy term. Premium for this type of term plan is generally higher than level term plans.

Increasing Term Plan

As the name suggests, an increasing term plan allows you to increase the sum assured on an annual basis during the policy period by keeping the premium same. This is the reason why premiums for this type of term plan are generally higher. This type of term plan keeps you covered with changing life needs at different stages in your life, including marriage, having a family and so on.

Decreasing Term Plan

Contrary to an increasing term plan, the sum assured gets reduced by a fixed percentage every year in a decreasing term policy. This policy comes in handy if you have taken a big-ticket loan. As you pay off the loan EMIs, the outstanding amount comes down, and so does the sum assured. You can say that the decreasing sum assured is a reflection of the outstanding loan amount.

Convertible Term Plan

This is another type of term life insurance plan that allows you to convert the plan into any other type of insurance plan at a future date. For instance, if you have purchased this plan for a policy period of 15 years, after 5 years, you can convert it into an endowment plan if desired. An endowment life insurance policy offers both death and maturity benefits. The premiums, however, remain the same.

How to Select the Best Term Insurance Plan?

Now that you know about the various types of term insurance, the next thing is choosing the right plan. So, how to choose term insurance? Let’s find out.

Optimum Coverage

You must select a term plan that gives you optimum coverage and helps your family maintain the same standard of living in your absence. Financial advisors say that the minimum coverage should at least be 15 to 20 times your annual income. So, if your yearly income is Rs. 5 lakhs per annum, you must buy a plan offering you coverage anywhere between Rs. 75 lakhs to Rs. 1 crore.

Factor in Loans and Liabilities

While choosing the best term plan, do factor in outstanding loans. The cover must be big enough that it allows your family to pay off loans with ease in your absence. Outstanding loans can be a big setback for families without their chief breadwinners.

Check the Insurer’s Claims Settlement Ratio

Before buying a term life insurance policy, do check the claims settlement ratio of the insurer. It’s advisable to opt for a plan from an insurer with a high ratio as it increases chances of your claims being settled on time.

Compare Before Buying

Lastly, compare different plans before buying on different parameters such as premium amount, coverage, inclusions, and exclusions. Today, there are various aggregator websites from where you can compare plans from several insurers.

Conclusion

Now that you know what is term insurance and its various aspects, it’s evident that it plays a crucial role in financial planning. If you are yet to buy it, you must do so immediately. On the other hand, if you already have a policy, review it and see if you need to augment coverage. 

Source: Edelweiss