Term Life Insurance 5

Term Life Insurance: A Step Towards the Safety of Your Loved Ones

    Malavika Chandel
    @Malavika-Chandel
    20 Followers
    1
    0
    1
    0
    1 Likes | 23 Views | Feb 1, 2025

    Term Life Insurance

    #Insurance is an important economic and financial activity in any country. However, how many of us understand the importance of insurance in our lives? Going by the 2020 IRDA policy, India is underinsured compared to other middle-income countries, such as China and Brazil, and developed countries, like the US and the UK. An insurance awareness campaign launched by IRDA in urban and rural areas of India found that people are still unaware of the benefits of getting insured. In 2021-22, the insurance penetration in India was 4.2% as compared to the global average of 7%.  One important element of insurance is #life insurance. In this article, we will discuss the definition and importance of #term life insurance, its key features, and why it is necessary to get insured.

    Adam Smith, a well-known economist, had simplistically explained insurance.

    He believed that insurance is beneficial because it gives financial security to an individual.

    This is true, as when something bad happens to a person, like a loss or damage, insurance covers that person by spreading the cost among many people.

    This helps the person from getting ruined by the loss and insurance also makes the burden lighter for everyone in the society.

    Understanding Term Life Insurance

    #Life insurance is an important tool available to a person that provides financial security (a sum of money or sum assured) to the family or beneficiaries of a policyholder in exchange for regular payments made to the insurance company, known as premiums. 

    A #term life insurance is a type of life insurance that gives money to the loved ones or beneficiaries of the policyholder, if something happens to him/her during a specific period.

    Term Life Insurance 1

    Image Courtesy: https://www.flickr.com/photos/182229932@N07/48333007522

    Difference Between Whole Life Insurance & Term Life Insurance

    What is the difference between #permanent (or whole) and #term life insurance products?

    In the 20th century, the insurance industry started providing term life insurance as an economical alternative to whole life insurance.

    Let us see the basic differences between them:

    • ·       A permanent or whole life insurance covers the policyholder's entire life.

     Term life insurance provides coverage for a specific period only, mostly ranging from 10-30 years.

    • ·       A whole life insurance provides benefits in 2 ways: a death benefit, which gives money to the beneficiary once a policyholder passes away, and a savings account (also known as cash value) which grows over time.

    Whereas, term life insurance covers death benefits only. It does not have a savings feature. If the policyholder outlasts the term, the policy collapses and no benefits are paid.

    • ·       Whole life insurance is mostly costly because of the high premium amounts.

    Whereas, term life insurance is very convenient with its cheap premium amounts, making it more affordable for lower and middle-income families.

    • ·       The factors taken into account when deciding the premium amount in whole life insurance include age, health, smoking habit, family medical history, occupation, and financial obligations.

    Term life insurance premiums are based on a person’s age, health, financial obligations, lifestyle habits, etc.

    • ·       In India, a whole life insurance policy cannot be converted to a term life policy.

    Depending upon the insurance company, a term life insurance policy can be converted to permanent coverage.

    Term Life Insurance Vs Whole Life

    Image: Difference between Term Life Insurance & Whole Life Insurance at a glance

    Different Types of Term Life Insurance Plans

    Here is the list of different types of term life insurance plans.

    They are based on how much they cover and the benefits they offer for a specific period.

    1.) Level Term Plans 

    They are the cheapest and simplest type of term insurance plan.

    Under this plan, the amount of money to be given to the beneficiary remains the same for the whole time the policy is with the holder.

    When the policyholder dies, the amount goes to the beneficiary.

    2.) Term Return of Premium Plans 

    The beauty of this plan is that it comes with the maturity benefit.

    With this plan, if the policyholder stays alive till the end of the policy, the entire premium amount is paid back to the policyholder.

    3.) No-Cost Term Insurance Plans

    A no-cost term insurance plan allows a policyholder to terminate the plan early and get back all the premiums paid until that date if he decides to exit the plan early.

    4.) Increasing Term Plans 

    In these policies, the policyholder gets the option to increase the coverage amount or sum assured, by the insurance company, every year during the policy.

    The good thing about this policy is that the premium amount stays the same even when the holder increases the coverage amount.

    However, these policies are costlier than the ones where the coverage amount stays the same.

    Term Life Insurance 2

    Image courtesy: https://www.needpix.com/photo/download/438077/insurance-protection-family-insurance-concept-insurance-policy-people-health-insurance-safety-care

    5.) Decreasing Term Plans 

    The decreasing plans are different from the increasing term plans.

    In these plans, the sum assured or the amount of money as promised by the insurance company goes down every year.

    They are suitable for people with big loans, such as home or personal loans. As they pay off their loans, the requirement for coverage decreases too.

    Hence, each year the sum assured decreases matching the decreasing loan amount.

    6.) Convertible Term Plans 

    Under these plans, the policyholders can convert the term insurance policy to some other type of plan.

    For example, if a person has bought the term insurance plan for 30 years but after 6 years, he wants to convert it into a permanent (whole) life insurance plan, he can do that.

    Considerations Before Buying Term Life Insurance

    The following factors must be considered before deciding to buy a term life insurance plan:

    • ·     Coverage Amount Required – The policy seeker must estimate the #coverage amount that will be sufficient to cover the financial expenses and obligations of the family in case of his/her death.

    To calculate the coverage amount, consider the age of the insurance seeker, current debt liability, family’s financial needs, lifestyle, habits, living standard, etc.

    • ·       Financial Obligations- The present and future financial obligations such as mortgage payments, education expenses for children, and outstanding debts should be considered and calculated before deciding to go for an insurance plan.
    • ·       Age and Health – The insurance seeker must account for his/her age and health condition.

    The younger and healthier the policy seeker is the lesser the premium amounts.

    • ·       Length of Coverage – Term insurance plans are mostly available for the length of 10, 20, or 30 years.

    One must choose the period of the plan carefully by taking into account his/her age, health, financial obligations, etc.

    • ·       Lifestyle Factors – Lifestyle has a big role in the premium amounts. People engaged in unhealthy lifestyle habits such as smoking, drinking, etc. have higher premium amounts to pay.
    • ·       Reputation of Insurance Company – A person must always buy insurance from a reputed #insurance company with a high rating.

     One must check two things:

    1.)  Claim Settlement Ratio: One must always choose the insurer with the highest claim settlement ratio.

    2.)  Solvency Ratio: An insurer with a high solvency ratio must be chosen as this shows that it can meet its short-term and long-term liabilities.

    • ·       Compare Premium Amounts – An insurance seeker must compare the premiums of different insurance companies to know if they are getting the best deal.

    Term Life Insurance 3

    Image courtesy: https://garystockbridge617.getarchive.net/amp/media/insurance-family-protection-people-a5c362

    Benefits of Term Life Insurance

    The #benefits of #term life insurance are listed below:

    1.) Safety Cover for Loved Ones

    Not all investments are done with the sole purpose of getting returns or profits in the future.

    Certain investments are made for the safety and security of our loved ones, especially if they are dependent on us, in the wake of any future uncertainty.

    2.) Economical Option

    Term life insurance is an economical option, the premium amounts are low compared to the large sum assured.

    So, even if a policyholder lives past the policy term, he/she doesn’t suffer much loss.

    3.)  Fixed Deposit Vs Term Life Insurance Policy

    People are often reluctant to buy an insurance policy and feel that investing in a fixed deposit is a better option.

    However, it is to be kept in mind that fixed deposits do not take into account inflation. Hence, the amount when matures does not hold much value.

    Whereas, term life insurance guarantees a large amount for a small expenditure.

    4.) Financial Freedom of Family

    There is no limitation on how the family or beneficiaries can spend the money.

    They can spend the money on education, medical bills, etc.

    The plan also provides the ease of choosing a lump-sum payment or monthly payouts of sum assured.

    5.)   Easy Convertibility

    The term life policy can easily be converted to some other plan, to enjoy greater coverage, depending upon the insurer.

    Drawbacks of Term Life Insurance

    Apart from the above mentioned, term life insurance also has some drawbacks:

    1.) No Savings Feature - With a term life insurance policy, there is no cash value or a savings account that grows over time.

    2.) No Payout of Sum Assured if Lives Past the Policy - If the policyholder outlives the policy term, no payouts or return of premiums happens.

    3.)  Limited Life Coverage – There is no lifelong coverage in the case of term life insurance. The death benefit coverage is only for the term of the policy.

    4.) Premiums may increase at the renewal of the term life policy.

    Term Life Insurance 4

    Image courtesy: https://commons.wikimedia.org/wiki/File:Insurance_icon.png

    Misconceptions Associated with Term Life Insurance

    • ·       Life Insurance is only for wealthy people – Life insurance is beneficial for all sections of society.

    It is more beneficial for low-income groups as they have fewer financial resources to rely upon in case of any eventuality.

    • ·       Life Insurance is very costly – Term life insurance is very affordable. They cover uncertainties at low-cost premium amounts.
    • ·       Term Life Insurance is unnecessary – Certain people discount the idea of uncertainty and feel that term life insurance is a waste.

    However, unexpected events can happen to anyone, and term life insurance can provide financial safety to your loved ones.

    • ·       Life Insurance should be taken in old age only – A common misconception is that life insurance is only beneficial for older people.

    However, keep in mind that the earlier the insurance policy is taken the lesser is the premium amount.

    Term Life insurance is equally beneficial for young people, especially if they have any dependents.

    Takeaway Message

    The higher premium amounts of general life insurance policies make them less lucrative options for the middle and low-income groups.

    Term life insurance can overcome the obstacle, with its cheap premium amounts against the large benefits.

    People should view the term life insurance plans purely as a financial tool, for providing a safety net to their family or dependents, instead of looking it as an investment option.

    Disclaimer: The views expressed in this article are the writer’s opinions and should not be considered a substitute for an expert’s advice.

    Suggested Readings & References