You work hard to ensure the happiness and security of your loved ones. However, life is uncertain and an unforeseen circumstance can create havoc in your family’s wellbeing. And ensuring the financial stability of your loved ones in your absence, especially if you are the sole earner is crucial.
The simplest way to achieve this objective is to invest in a life insurance policy. Such plans pay your beneficiaries the benefits in case of an unforeseen event resulting in your absence during the policy duration.
Different types of life insurance policies, such as endowment plans, term plans, money back plans, and much more are available. A term insurance plan is the simplest form of life cover. Read on to know everything about it.
How does term life insurance work?
At its basic level, a term policy is a contract between you and the insurer. You pay the premium for a pre-specified period and the insurance company agrees to pay the term insurance benefits to your beneficiaries in your absence during the policy duration.
It is a pure life cover and secures your family’s financial future in an unfortunate event. Most term plans do not offer any maturity benefits if you survive the policy duration. Having understood how term insurance works, here is why you should buy one.
Why you should buy a term life insurance policy?
Survival of your family in your absence can become difficult due to rising inflation resulting in higher lifestyle expenses, education costs, and loan instalments.
To ensure your loved ones do not suffer financial distress in your absence, having a substantial corpus is important.
A term life insurance policy can offer financial stability for your family members and ensure they can sustain their lifestyle without any hassles.
Key benefits of term insurance policy
Flexible payout options
You may opt for a lump sum payout of the policy benefits, which allows your loved ones to repay any outstanding loans and meet other expenses.
Alternatively, you may choose that your family receives a certain lump sum and the balance in regular intervals to take care of their daily expenditure.
Since term plans are pure life covers without any survival benefits, the premium is lower when compared to other life insurance plans. This allows you to get a higher sum assured (SA) for a lower premium.
Another term insurance benefit is the availability of multiple riders for additional coverage. You may add riders, such as critical illness cover, accidental death benefit, or waiver of premium to avail of comprehensive coverage.
Different types of term life insurance
Based on the coverage and benefits, term life insurance plans are classified into the following five categories.
It is the most basic type of term insurance where the SA remains constant during the entire policy duration. The benefits are paid to your beneficiaries if an unfortunate circumstance results in your absence.
Term plans with return of premium (TROP plans)
Most term plans do not pay maturity benefits. However, if you opt for TROP plans, the entire premium is paid as a survival benefit at the end of the policy duration.
These plans allow you to increase the SA every year without any rise in the premium to meet the financial requirements at various life stages.
As you grow older, your financial burden reduces as most of your loans are repaid and your children become independent. Decreasing plans reduce the annual SA and help balance insurance needs with liabilities.
You may convert the term life insurance plan to another type of policy in the future. For example, you can convert your 20-year-old term insurance to an endowment or whole life plan after a few years, if required.
Why it is important to choose the right term life insurance plan?
A term plan ensures your family does not face financial distress in your absence. However, choosing the best term life insurance policy is important to maximise the benefits.
Opting for the right term is necessary to make sure all your family’s financial objectives are met with the policy benefits paid to them in your absence. Choosing a longer term is important as it ensures adequate funds are provided to meet your children’s education and other regular expenses.
You must ensure the SA is sufficient to meet all your family’s financial requirements. In addition to the regular household expenses, you must consider education expenses, loan installments, and your spouse’s retirement costs (if you are the sole earning member) to determine the adequate SA.
Several insurers offer the best term insurance products, and it is recommended you compare different plans before making your decision.
Frequently asked questions (FAQs)
Can you cash in a term insurance policy?
Most term insurance policies do not include any cash component. The policy benefits are paid to your beneficiaries only in your absence during its duration.
If you want to choose an insurance policy that allows you to build a corpus over a period, you may opt for a whole life policy or a unit-linked insurance plan (ULIP).
What happens if you survive the term insurance policy duration?
At the end of the term insurance policy duration, you may either buy a new policy at a higher premium or remain uninsured. If your term policy included a guaranteed renewal clause, you can renew it yearly; however, you will still have to pay a higher premium amount.
Although it is more expensive, it can be advantageous if you are diagnosed with a terminal ailment that makes it nearly impossible to buy any other type of insurance coverage.
Do you receive the money at the end of the term insurance policy duration?
No, most term plans pay only the policy benefits to your beneficiaries if an unforeseen event results in your absence.
However, if you opt for a TROP plan, the entire premium amount is returned if you survive the policy duration. However, these plans are significantly more expensive than a regular term policy
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