Term assurance is a policy that pays out a lump sum in the event of death occurring within a specified period.
Term assurance has a variety of uses, such as ensuring there are funds available to repay a mortgage in case someone dies, providing a lump sum that can be used to generate income for a surviving partner, or providing funds to pay any tax that might become payable on death.
When taking out life cover, the individual selects the amount they wish to be paid out if the event happens and the period they want the body to run for. If they die when the cover is in place, a lump sum will be paid out that equals the amount of life cover selected. With some policies, if an individual is diagnosed as suffering from a terminal illness that is expected to cause death within 12 months of the diagnosis, then the lump sum is payable at that point.
How Much Could be the Term Insurance Premium?
The amount of the premiums paid for term assurance will depend on:
- Amount insured;
- Age, sex, and family history;
- Other risk factors include state of health (for example, whether the individual is a smoker or non-smoker), his occupation, and whether he participates in dangerous sports such as hang-gliding; and
- Term over which cover is required.
A term insurance policy is a pure risk cover for a specified period. This means that the sum assured is payable only if the policyholder dies within the policy term.
In Term Insurance, there is no element of savings or investment. Instead, it is a 100 percent risk cover. It simply means a person pays a certain premium to protect his family against sudden death. The insurance company forfeits the amount if the insured outlives the policy period. This explains why the Term Insurance Policy comes at the lowest cost.
Types of Term Insurance Policies
Level Term Insurance
Under this plan, the sum assured remains exact and uniform throughout the policy term. In case of death happening anytime, the sum assured amount is payable. It is the most specific policy.
Decreasing Term Insurance
The premium under this plan remains constant throughout the plan’s term, but the benefit payable decreases with time. Thus, the benefit payable depends not on the initial sum assured but is based on the prevailing sum assured at the time of death. Not a very popular product
Increasing Term Insurance
Under this plan, the premium and benefits increase with time on an agreed basis. The increase could be a fixed percentage or linked to any index. This is an important policy that keeps pace with inflation.
Renewable Term Insurance
The term insurance policies are generally issued for a fixed term. Under this policy, the policyholder is given a right to renew the policy without submitting fresh evidence of health status. The premium, however, will change depending on the rating done by the company.
Convertible Term Insurance
Under this plan, the policyholder has an option to convert a term insurance plan to a permanent insurance plan without undergoing any medical test, e.g., conversion from a term insurance plan to a whole life insurance plan.
Term Insurance with Return of Premium
Under this plan, the premium and sum assured remain constant throughout the policy period as in level term insurance. The only difference being the policyholder on survival gets back the total premium paid.
Features of Term Life Insurance Plan
Affordable Premium
Term life insurance premiums will be lower when compared to other insurance policies like Endowment Insurance, Money Back Insurance, etc. Therefore, term life insurance is the best insurance plan if you’re looking for the maximum amount of death benefit for your insurance premium.
Temporary Insurance
Term insurance provides coverage for a temporary period, say for one year or even ten years. It could be taken for various purposes like life insurance, home loan insurance, etc.
Simplicity
In the world of insurance, there are many plans available by different insurance companies, like term insurance, whole life insurance, endowment insurance, Unit Linked Insurance, etc. These plans could be complicated to understand except for term insurance. A term insurance plan is usually simple to understand.
Flexibility
Term life can be canceled quickly if needed. At the same time, other life insurance plans could be difficult to cancel a plan, for example, a Unit Linked Insurance Plan. Few insurance companies provide features for converting a term insurance plan to other types like endowment plans or whole life insurance. This, however, may require payment of an additional premium.
Conclusion: Important to have a Term Insurance Policy
The term insurance policy is a type of insurance, and it is an integral part of the financial plan. It protects against the loss they may incur due to unforeseen circumstances. The term insurance policy protects the insured person against any future loss due to an event that has not been foreseen. It also covers medical expenses incurred in case of death or disability of the insured person.
In general, a term insurance policy’s benefit could be used to:
- Provide a lump sum to pay out all debts a person owes, for example, mortgage, car loan, credit cards, etc.
- Provide a lump sum for the beneficiary to invest for future income.
- Provide a lump sum to cover any general, significant future expenses (such as school fees, an adult child’s wedding, etc.
