Term Insurance Definition
Under this insurance, coverage is for a specified amount of time. Beneficiaries are paid at face value of the policy and are protected from any financial losses upon death. The maximum duration for the term insurance is usually 35 years. Term life insurance is the most frequently selected policy from life insurance.
It is very useful if you require life cover for a limited duration and “premiums for Term Insurance are much cheaper” than any other type of life insurance. It is always recommended to buy this policy between 27-32 years of age for 30-35 years of duration. The major disadvantage of this policy is that there are no benefits or sum assured upon survival after the expiry of the policy term.
Term Insurance Example: Ms. Taruna at 29 years of age purchased Term Insurance policy valid for 35 years for sum assured of Rs. 75,00,000/- and she died at the age of 60 years. Since policy is valid upon death, insurance company offer will pay beneficiaries Rs.75,00,000/- as the sum assured after the death of Ms. Taruna.
Types of Term Insurance Policy
1. Annual Renewable Insurance Plan: These types of term plans provide life cover for one year which can be renewed at the higher premium rate thereafter without any proof of insurability. There are some policies requires proof of insurability upon renewal. The major disadvantage of annual renewable term insurance policy is that the premium of the policy changes every year. In other words, the policyholder has to pay a higher premium year after year upon renewal.
2. Level Insurance Plan: In these types of term plan premium is fixed for specified years. After that policy may be renewed with a higher premium rate. Premium rates get higher with an increase of age for the term insurance. Note that renewal is limited up to a certain age or maximum policy tenure. It cannot be renewed for the entire life of the policyholder. Level Term Insurance Example: Ms. Taruna at the age of 29 years has bought the level insurance plan for 25 years where maximum policy tenure is 35 years of age. In that case upon survival after 25 years, Ms. Taruna can renew the policy for an additional 10 years with new premium rates.
3. Return of Premium Insurance Plan: Under this plan, the insurance company will return some of the premiums paid upon survival and expiry of the insurance plan. Premiums of this kind of policy are much higher when compared with normal term insurance policy. When returning premium, the insurance company will deduct fees or expenses that occurred while holding policy. Mostly 70% – 80% of the premium amount is returned under this policy plan.
4. Decreasing Insurance Plan: Under this insurance, the premium of the policy changes at specified levels and the corresponding death benefit also keeps on decreases with duration. Premium paid for this kindly of policy plan is lower and that is because the probability of expiring policy without benefits is much higher. Such types of policies are merged with home loan insurance.
Decreasing Term Insurance Example: when you purchase a home loan from the bank, the bank may ask you to buy such a kind of insurance policy along with the home loan to protect the loan against any uncertainties. Few of the banks have made mandatory along with home loan whereas some banks allow customers as an option.
Advantages or Benefits of Term Insurance Plans
- Term Insurance is one of the cheapest forms of life insurance.
- This Insurance does not involve any investment plans or maturity schemes, It clearly says that it’s purely a death protection policy which makes this insurance simplest.
- Term insurance offers guaranteed lock-in rates from 1 to 35 years. The policyholder can purchase a policy at an affordable rate without a change in a premium price for lock-in years.
- With insurance, you can flexibility to separate life insurance with your investments. It is highly recommended not to club investment with insurance. Practise followed largely in the world is “Buy Term and invest differences separately”.
Disadvantages or Drawbacks of Term Insurance Plan
- Premium rates get increased after the guaranteed lock-in period. If a customer has 10 years level term policy then at the time of renewal premium rates will be changed.
- If you require insurance beyond the life expectancy rate then term insurance is not the recommended a way to cover your life.
- Mostly this insurance does not have any cash value upon maturity only policy with return of premium will payback premium paid as a cash value but if you are looking for good lump sum amount on maturity then term insurance is not worthwhile.
Exceptions of Term Insurance Policy
“Term Insurance” does not cover deaths due to following reasons:
Many people are not aware of this fact that despite all these benefits there are few limitations. Term insurance does not cover death due to terrorist attacks, war or natural calamities such as flood/earthquake. This cause is added in insurance policies to protect the company against huge claim settlements occurred at a specific time. Perhaps sometimes it has been noticed that such claims are undertaken under humanitarian ground when the Insurance Regulatory and Development Authority (IRDA) is approached by the nominee.
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