Coming to terms with term insurance
Term insurance is often referred to as ‘pure insurance’. Term policies provide life insurance coverage for a specified period of time. You can typically buy term insurance for periods ranging from 1 to 30 years. If the policyholder survives the term, the risk cover comes to an end.
What is Term Insurance?
Individuals in India are used to insurance products that offer returns on premium paid. The maturity of such a policy brings with it a huge lump sum accumulated over a large number of years.
Normally, in term insurance, maturity proceeds are not available, though under certain plans, premiums are refunded on maturity. Term Insurance Policies are cheapest as compared to traditional insurance products and cater to the specific need of an individual to cover the risk of death.
You will not be SOLD term insurance, you need to BUY one
Features of Term Insurance Policies
As term insurance is a form of ‘pure insurance’ that provides maximum risk cover for the minimum cost. There is no surrender, loan or paid-up values granted under these policies because no reserves are accumulated. These features make term insurance the cheapest amongst whole-life, endowment and other types of life insurance policies.
If the premium is not paid with the days of grace, the policy will lapse without acquiring a paid-up value. Once you reach a certain age (usually 60 or 65), you may find it difficult to get term insurance coverage for more than five years and the premiums will be expensive.
You may also find it difficult to get term insurance coverage if you develop a medical condition. However, you may be able to renew your existing policy without a physical exam. There are several variations of term life insurance including level term, return of premium and renewable and convertible term insurance.
Term insurance can be bought with some additional benefits. Many insurance companies offer riders that you can add-on to your term insurance plan, such as Accident Death Benefit, Critical Illness, Accelerated Sum assured, Permanent Disability Benefit, Accidental Death and Dismemberment, Permanent Total Disability, Permanent partial disability, Waiver of Premium riders. Each of these riders have their own benefits and come with extra cost, you can choose the ones that you need based on your specific needs.
Who should buy term insurance?
Ideally, term insurance should be the first insurance policy that you should buy.
Term insurance policies are suitable for people who wish to provide maximum insurance protection to the family at a minimal cost. This plan is well suited for the value-conscious people. Term insurance plans are best suited to people in the age group of 25-50 years. Term insurance coverage typically costs less than cash value (whole life or endowment) insurance coverage. However, the cost of obtaining a term insurance policy increases as you get older and if your health deteriorates.
When you are young, say around 25-30 years, go for term insurance for the maximum amount and for the maximum term that the insurance company can offer you. The premium are relatively cheaper. You will continue to pay the same premium amount for the entire term of the policy.
Your insurance agent gets the lowest commission for selling term insurance, which makes these policies unpopular amongst agents
Of course this is not to say that term insurance is right for everyone. Even if you have other types of insurance policies like endowment, whole life, Unit Linked Insurance Plans (ULIPs), buying a term insurance can provide you the benefit of maximizing your risk cover with optimum cost.
For a high net worth individual buying a term insurance is a sensible choice to cover large housing loans or business loans. It provides the much-needed economic hedge against risk and protects your family and/or your business.
What to look for in term insurance policy before buying?
Choosing the best term insurance policy is very easy. As term plans just offer pure risk cover, a good point of comparison between the products of various insurance companies is on the basis of premium charged for the insurance cover that you need. You might also consider the tenure or term of cover that you can buy. Finally, choose the term insurance that offers you the maximum term, at lowest possible cost, simple.
You don’t really ‘Buy’ insurance like many other fellow Indians; insurance is ‘Sold’ to you. The fact that term insurance being the cheapest option available for many, also means that your insurance agent will get lowest commission for selling a term insurance policy to you. As a result, not many insurance agents are eager to provide you details of a term insurance plan. It is generally sold as a last resort to a customer who otherwise would not have bought any insurance policy from them.
You should always consider the personal circumstances and objectives before deciding to buy one. Further, you need to take charge and ask specifically for a term insurance plan from your insurance agent.
He has authored several analytical articles on personal finance in The Times of India and The Economic Times. Being a finance geek and having been involved with internet since the early days of the medium, he was a great help and source of guidance while formulating personalmoney.in. You can know more about Manish at ManishMisra.com
Disclaimer : Manish has agreed to write in his personal capacity. Views, opinions expressed in his articles are his own and do not necessarily reflect the views of his employer.PersonalMoney.in