The word insurance embeds a sense of security in our minds.
People often ask us, “Are you insured?”
Most of us a have a basic idea about insurance but how many of us know what a term insurance is?
Term insurance is simply a type of life insurance that provides coverage for a specified term or duration. The death benefit is paid if the insured dies during the specified period and the insurance is active.
Why is Term Insurance better?
There is no saving or profit component in a term insurance plan. Compared to a similar endowment plan, it is easy for the policyholder to opt for a large life cover at a lower premium.
Level Term Policies
There are various types of term policies offered. Level Term policies are often referred to as those policies which offer leveled premiums for the duration of the policy, like 10,15 or 20 years.
The premiums for these policies are set for a pre-determined number of years, after which the premium increases significantly, thus making the policy cost restrictive
Key Features of Term Insurance
The insurance companies have been innovative with regards to term plans. The companies have reduced their premium rates and they have also started offering an extra discount to categories like non-smokers, people with no history of chronic diseases, etcetera.
2. Large Life Cover
The affordability makes it possible for everyone to opt for a longer life cover with the same premium as an endowment plan.
In fact, a term plan would be more feasible in the long term.
3. Cover Enhancement
The life cover can also be enhanced during the critical stages of the policyholder.
For example, a person may be allowed to enhance the life cover by 50% during his/her marriage and 25% on becoming a parent.
This provides flexibility to increase the premium when the ability to pay increases.
Benefits of Term Insurance
Term plans ensure flexibility by allowing discontinuation of the term policy.
On the other hand, cash value policies give the benefit only if they are held for the full-time period of the policy.
Thus, a financial loss occurs in cash value policies because the savings in the policies are given only after certain deductions.
2. Ample Information Available
There is a lot of information available on term policies, hence, buyers are well aware of the regulations.
These policies are easily compared with each other, depending on the price and structure. Therefore, buyers can are not left in the dark. They are well aware of the benefits of term plans.
3. Simple to Understand
Term policies are structured in such a way that they are easy to understand even for an amateur.
Just pay the premium and the cover is provided for the chosen period!
Disadvantages of Term Insurance
1. Price Increases Gradually
The premium increases every time with the renew of coverage, because, the chance of dying increases with age. The likelihood of death increases the risk of the insurance companies as it is more certain to pay a death benefit.
The renewable life insurance is available where the premium paid remains the same during the tenure of the contract.
2. No Cash Value
Most term policies have no cash growth as it builds no equity. Basically, return of premium or ROP is absent.
3. Cost Prohibitive
Term insurance becomes more cost prohibitive over time because they are designed to be temporary.
Thus, term plans are not good if one wants to opt for a policy that extends beyond the life expectancy
Comparison Between Term Plan, Unit Linked Insurance Plan (ULIP) and Endowment Plan
|Unit Linked Insurance Plan (ULIP)||
|Benefit on Death||Sum assured paid as death benefit||Higher of the Sum assured or fund value is paid on death||Sum assured along with bonus accrued is paid as death benefit|
|Maturity Benefit||Maturity benefit is not there except in return of premium plans where the premium paid are returned||Maturity benefits are available||Maturity benefits are available|
|Premium||Lowest Premium. Depends on age, sum assured and plan term||Premium is decided by the individual on basis of which sum assured is decided||Premium remains higher than term plans and depend on sum assured, age|
Before subscribing to this kind of insurance, the insurer must remember that term plans cover only the risk of premature death.
Thus, we can say that it is the purest form of life insurance and provides a sense of financial security for the individual and the family as well.
Disclaimer: The views written in this post are that of the author and not those of Groww