When it comes to term insurance, it is considered the strongest system of financial security. That is why, in today’s time, while planning their finances, people focus heavily on investments, mutual funds, and the stock market. However, the true foundation of any sound financial plan is protection.
Term insurance is the most secure and reliable form of life insurance. If you are the primary earning member of your family, then term insurance is not an option but a responsibility. It is the most powerful and effective way to protect your family’s financial stability in the event of your untimely death. Today, we will first understand what term insurance is and why it is so important.
What is Term Insurance?
Term insurance is the purest and most basic form of life insurance. Which is no less than a boon for the policyholder.
It is an insurance contract in which the insurance company promises that if the policyholder dies during the term of the policy, the sum assured will be paid to his nominee.
Why is term insurance different from other types of insurance?
• Traditional insurance plans (endowment/money back) are a mix of savings and insurance.
• Term insurance provides only pure risk cover.
• If the insured survives till the end of the policy term, there is no refund in the normal term plan.
Note: This is why term insurance premiums are low and life cover is very large.
Why is life insurance important? (Importance of Term Insurance)
Often people think that term insurance is a "waste of money" because it does not give returns.But the truth is, it's not an investment; it's a safety net. Which proves to be no less than a boon in maintaining the financial stability of the policyholder's family.
Advantages of Term Insurance:
• Large cover at a low premium.
Life cover of up to ₹1 crore can be possible at a premium of ₹800-1500 per month in young age and good health.
• Protection against debt.
The responsibility of a home loan, car loan, or personal loan does not fall on your family in your absence. This is a great benefit that gives a life of dignity.
• Safeguarding children's future
Financial security is provided for children's education, marriage, and other major expenses. This will ensure a better future for the child.
• Peace of mind.
Confidence that your family will be able to lead a respectable life even in your absence.
Types of Term Insurance
• Level Term Plan.
The insurance amount and premium remain the same throughout the period. The most popular option.
• Increasing the duration of the program
Every year, the insurance amount increases by a fixed percentage (e.g., 5%), which reduces the impact of inflation.
• Decreasing Term Plan.
It is usually used for home loans. As the loan decreases, the cover also decreases.
• Return of premium (TROP)
On completion of the policy term, the premium paid is returned, but the premium is much higher than the normal term plan.
How to Choose Right Sum Assured?
• The income multiplier method.
Cover 15-20 times of annual income.
• Need-based approach
Monthly expenses of the family
Future goals
Existing debt
Reduce existing savings.
• Human Life Value (HLV)
Calculation based on future income potential. Online HLV calculators are useful.
The riders: See additional security options.
These riders make the policy more robust but take only as needed.
The main riders:
• Accidental death benefit.
• Critical Illness Rider
• Waiver of Premium Rider
Unnecessary riders can increase the premium.
How to choose the right insurance company?
Consider these three factors when choosing an insurance company:
• Claim Settlement Ratio (CSR)
A CSR of 97% or more is considered good.
• Amount to settlement ratio
This shows how honestly the company pays the big claims.
• Solvency ratio.
According to IRDAI, a minimum of 1.5 is mandatory.
Causes and Prevention of Claim Rejection
Most of the claims are rejected due to concealment of wrong information at the time of the claim.
Cautions:
• Provide accurate information about smoking/alcohol.
• Don't ignore chronic diseases.
• Do not take any medical tests.
Section 45 (3-year rule)
After 3 years it becomes extremely difficult for the company to challenge the policy, and the onus is on the company to provide evidence.
Term insurance and tax benefits
• Section 80C.
Tax deduction of up to Rs 1.5 lakh
• Section 10 (10D)
The benefit is completely tax-free.
Term insurance is not a means by which you will become rich, but it is the protective shield that protects your family from being financially weak. So that's a misconception. Since this proves to be a great boon in the respectful life of the policyholder's family, it is hoped that this information is good. Thus, the best age to take term insurance is today, as premiums increase with age. Increased risk of diseases First security, then investment-that's a sensible financial decision.
Disclaimer: This article is for educational purposes only. Before buying any insurance policy, read the terms and conditions and policy wordings carefully.
Tags
Life Insurance