What is Term Insurance?

Term Insurance, like all insurance plans, is a contractual policy between the insured policyholder and the insurance company. It is also called Term Life Insurance as it is one out of the many types of life insurance policies. Term insurance safeguards the family of the insured if the latter passes away in an untimely demise. The insurers pay the claim amount if the policyholder dies before the term of the policy ends.

How Term Insurance Works?

Like all insurance plans, term insurance also distributes the risks and the costs among various insurance holders. The policyholder pays the premium while living to avail of term insurance coverage for the family after own death. The insured can pay through regular month-wise payments, yearly, as well as one-time payments. It allows flexibility of payments. Term insurance provides coverage to the dependent family, either through a one-time payout or at a fixed rate of periodic payments for a limited duration of time.

There are no benefits for the policyholder as long as s/he lives. Term insurance is essentially a life cover and not a savings or investment plan. Also, there is no benefit if s/he outlives the tenure of the term insurance. Neither the policyholder nor the family gets anything. There is no maturity date of the policy but only the coverage to the family post the insured’s death.

The eligibility age or age of entry to buy term insurance is as low as 18 years. Thus, more and more youngsters can buy term insurance policies. Buying the term policy early helps in gaining a large lump sum of insurance amount at low premiums.

Features of Term Insurance:

The very basic feature of term insurance is to provide life insurance to the policyholders. Therefore, the dependent families will be given financial security in the event of their deaths. Hence, it is called the death benefit. The other features of the term insurance are:

  • Term insurance provides financial security through insurance claim money. So, this helps the family to overcome liabilities, expenses and achieve other goals
  • Policyholders can upgrade the term insurance amount by updating the policy. They may need to change the policy to suit the financial needs of the family
  • In case, the policyholder lives longer than the term period of the insurance policy, then the policy expires. The family will not receive the term insurance money in case the previous policyholder dies after the expiry of the term
  • Term insurance is in contrast to other life insurance plans like endowment plans or pension-cum-insurance plans. In those plans, there is a dual benefit. The family of the insured receives insurance money if the policyholder passes away. Also, if the insured lives past the term of the policy, the policyholder receives the amount upon maturity
  • Term insurance plans may not provide insurance money to the insured if s/he outlives the term. However, it is one of the most common insurance plans as it is affordable with low premiums
  • Some term insurance plans now cover up critical illnesses and terminal illnesses of the insured. It is important to check with the insurance company and its policies. Check if they provide covers for medical purposes. If yes, then what diagnosed illnesses are covered up. See if you are eligible for the payout

Difference between Term Insurance and Life Insurance

Term insurance is a type of life insurance plan and hence the difference is with other types of life insurance plans. Life insurance policies are of many types like ULIPs, pension/retirement plans, endowment plans, whole life insurance plans, and money-back insurance plans. But, all these other plans are savings/investment-cum- insurance plans. Term insurance is necessarily an insurance policy and does not offer any returns on the premium amount or payment on maturity. It only pays out to the family in the event of the death of the insured.

Benefits of Term Insurance

It is difficult for the family to deal with the death. But it is worse when the sole earner or the primary breadwinner for the family passes away. So, the term insurance can take care of finances for your family in your absence. The benefits of the term insurance are:

  • It can take care of daily expenses, short-term as well as long-term goals
  • Term insurance money can make up for pending payments. If you owe a loan amount, credit card bill, or any such liability. Then, it will be an additional burden to the dependent family who already lost an earning member. Without insurance, matters will be worse for the grieving family
  • Term insurance is a life insurance plan that carries tax benefits of Section 80C of the Income Tax Act, 1961. Hence, you are tax-exempt up to Rs. 1.5 Lakh annually
  • Although term insurance is not an investment/savings plan, it can take care of lifestyle and health issues in later years. Not all but some term insurance policies payout for diagnosis of certain illnesses
  • It is affordable and quite a common insurance instrument. It is because you can build a sizeable insurance corpus by paying small premium amounts

Premium Waivers

In some cases, the company waives off the premium of the term insurance. It gives a waiver if the policyholder has a loss of income caused by a mishap. Also, if there is a disability due to the accident. It is for a limited time period. The basic policy of term insurance often attaches additional benefits of premium waivers. These add-on advantages include critical illness coverage, accidental death coverage, etc. These are termed as ‘insurance riders’.

Joint Term Insurance

You can also buy a term insurance policy for your spouse. Also, you can hold a joint term insurance plan with your spouse. It is a relatively new concept. A surviving partner may claim the full or partial insurance amount of the spouse that passed away. The surviving partner may have to pay his/her own premium. Alternatively, there can also be a waiver for future premiums depending upon the arrangement of the policy. It matters who is the primary policyholder.

Wrapping it up:

Term insurance is often considered to be the simplest and purest form of life insurance. It is a coverage that comes at a relatively low rate of premium. Many insurance companies often provide life covers up to 99 years of age in term insurance policies.

What is the maturity benefit of term insurance?
There is no maturity benefit of term insurance as it is a life cover and not an investment plan. It does not offer a return on the premium paid but financial coverage of the dependent family of the policyholder if the latter meets an unfortunate death during the policy’s term. The insurance amount is paid not on maturity but in case of an eventuality.
What factors determine the term insurance coverage and premium?
A lot of factors are taken into consideration before deciding your term insurance coverage amount and the premium you will have to pay. It checks medical records, occupation, family’s medical history, age, gender, lifestyle, etc.
What happens if one spouse passes away in a joint term insurance plan?
If one spouse passes away in a joint term insurance plan, then there can be a few possibilities as listed below, depending on the arrangement in a term insurance policy:
  • The surviving partner may be able to claim the insurance amount partially, that is the amount coverage for the bygone spouse, and will have to continue to pay one’s premium
  • The other partner can claim the full amount but will also not need to pay the future premiums and the policy ends there. This amount can be in a lump sum or periodic payments or a combination of both
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