What is Term Insurance? How does Term Plan work?

In this financial age, we hunt for ways to park our money to get the highest possible returns while still building wealth. It is often recommended that we begin investing when we are young to have a consistent cash flow by the time we retire.

However, the popular advice we typically receive at that age is to take chances and invest in mutual funds or the stock market. But this blog takes a distinct route as it talks about getting an insurance plan for yourself. By purchasing health or life insurance, you can be relieved of a significant financial burden in the event of unanticipated situations and it’s always better to start early. This also reduces the large investment cost as you start with a low premium at that age. Although there are several types of insurance, life insurance is one of the most crucial and term insurance is a type of life insurance policy.

One of the simplest and most popular types of life insurance is term insurance. Let's learn more about term insurance plans, the benefits they offer, and important considerations for selecting the right term insurance policy.

What is a Term Life Insurance Plan?

A term insurance plan or policy is a type of life insurance plan that provides you with life insurance coverage for a specific or pre-determined time period. It protects both, you and your family financially at affordable rates if started at a young age. Term insurance provides coverage for a pre-decided sum of money if the policyholder passes away during the policy term.

An online term insurance premium calculator can be used to determine the amount of coverage you would need to protect your family financially in case of your unexpected death. It is recommended to get an estimate of the premium for your term insurance policy beforehand. This will help you identify the sum insured by the policy and tailor it to meet your specific needs and circumstances.

A term life insurance policy is advantageous for a number of reasons, especially now that things are unpredictable. It helps to ensure that your family won't face more financial difficulties in the event of your untimely death, especially if you are the only provider for the family. Let's look more closely at the elements you must consider before buying a term life insurance policy.

Why is Term Insurance Important?

1. Financial Security: The most obvious reason to start paying your term insurance premium is to give you and your family peace of mind in case something bad happens. If you are the main source of income for your family, it is important to set up a monthly plan for money through term insurance in case you die.
2. Affordable The least expensive of all life insurance products, term insurance has the most alluring attribute. With as little as Rs. 400–500, you can start making premium payments for a life insurance policy with a maximum payout of Rs. 1 crore as early as the age of 18.
3. Flexible: Most term insurance policies are flexible and can be adjusted to fit your changing financial situation. You can increase the amount of coverage, and add additional benefits and riders, such as critical illness or accidental death coverage, as needed, particularly during significant life events.
4. Tax-Benefits: There are tax benefits associated with term insurance policies. The premiums you pay towards your policy can be deducted from your total income under Section 80C of the Income Tax Act of 1961, up to a limit of 1.5 lakhs. Additionally, you can claim the payouts under Section 10(10D) and the premiums under Section 80D without worrying about taxation.
5. Maturity Benefits: Maturity Benefits: Your premium secures your insurance coverage, giving you a sense of financial freedom. You can purchase a term insurance policy that will reimburse you for the entire premium amount upon maturity. This feature enables you to avoid any other investment risks you might be facing at that moment. Furthermore, it provides comprehensive life insurance coverage for you and your loved ones in the event of an unexpected situation.

Important Factors For A Term Insurance Plan

1. The Insurance Cover: To choose a term insurance plan, it is essential to understand the terms and conditions of the policy. You need to assess your age, debts, financial resources, and lifestyle needs to determine a viable plan and calculate the premium amount. This will allow you to plan ahead and avoid any delays during emergencies.
2. Medical Cover: One important factor to consider when selecting a plan is medical or critical illness coverage, which is often overlooked. Nowadays, most term insurance policies include critical illness coverage that offers protection to you and your family during adverse times and throughout your life. This coverage stabilises you financially against life-threatening conditions that may have long-term effects on your health, such as cancer and heart attack.
3. Claim Settlement Ratio: When considering a term insurance policy, it is crucial to take into account the claim settlement ratio. This ratio indicates the number of claims settled by an insurance company in a given year, providing insight into the reliability of their term plan. Keep in mind that the higher the ratio, the greater the reliability.
4. Additional Benefits: It is important to find a term insurance policy that covers a big chunk of your financial plan. There are, however, a number of extra parts to term insurance that should be thought about. For instance, if your policy offers maturity coverage or accidental coverage. A term insurance plan with comprehensive coverage and a premium waiver or income benefit is also a preferable choice for the ideal term insurance policy.
5. Solvency Ratio: This financial ratio must be taken into account when deciding to sign up for a term insurance plan. The solvency ratio helps identify the capability and strength of an insurance company to settle claims. It will help you understand your coverage better and prevent you from losing your premium amount. Having a solvency ratio of 1.5 or higher is ideal for getting the right amount of term insurance coverage.

Term Insurance Premium Calculator

The premium to be paid can be calculated using a term insurance premium calculator that is usually available on all insurance providers’ websites. You must enter information such as your date of birth, gender, whether or not you smoke, and the amount of coverage required into the premium calculator. The premium calculator will display the premium amount as well as the policy's supplementary benefits to ease your understanding.

Renewal process of term insurance

Renewing your insurance policy is an essential step to ensure that you continue to be protected against unforeseen circumstances. If you have term insurance, renewing it is a quick and hassle-free process that can be completed by following a few simple steps:

1. The first step in renewing your term insurance policy is to review your current policy. This is important because you may want to make changes to your policy or switch to a different insurance provider. By reviewing your policy, you can ensure that you have the right coverage that meets your current needs.
2. Once you're ready to renew your policy, visit your insurance provider’s website and look for the renewal tab. Click on the tab and provide the necessary details, such as your policy number and personal information. Once you've entered all the details, click on the confirm button to initiate the renewal process.
3. Finally, make your payment. When it comes to payment methods, there are numerous options. You can choose any of them at your leisure.

What should you know about the claim process?

When a policyholder passes away, their dependents may be eligible to receive the amount insured by the insurer. To claim a term insurance policy, several steps must be taken.

Following are the steps:

1. Inform the insurer: This can be done through various available mediums, such as email, phone or mail. The insurer must be notified about the policyholder's death and the claim request.
2. Submit the documents: The dependents are required to submit several documents to support their claim. These documents typically include the original life insurance policy documents, proof of the claim, the policyholder's death certificate, and medical records. Additional documentation may be requested by the insurer to support the claim as well.
3. Claim settlement and payout: On submitting all documents,, the insurer begins the verification process. The documents are checked for accuracy and authenticity to ensure that they meet the requirements of the policy. If everything is in order, the policy is honored, and the payout is made to the dependents. However, if there are any discrepancies or contradictions, the insurer may reject the claim.

Term Plan VS Endowment Policy VS ULIP

Term Life Insurance VS Whole Life Insurance

When it comes to insurance, there are two main types that are often discussed - term life insurance and whole life insurance. Term insurance provides coverage for a specified period, while whole life insurance offers coverage for the entire life of the policyholder.

Term life insurance policies typically have lower premiums compared to whole life insurance policies. They also do not accumulate cash value over time and do not have a savings component. However, they offer more flexible coverage options, making them suitable for short-term needs. These policies are renewable upon expiration, allowing the policyholder to extend the coverage period.

On the other hand, whole life insurance policies have higher premiums but accumulate cash value over time. They also have a savings component, which can be used for future expenses or as an investment. Whole life insurance policies offer limited coverage options but are suitable for long-term needs.

To better understand the differences, have a look at the table below:

In conclusion, term life insurance and whole life insurance policies differ in several key aspects, including coverage period, premiums, cash value, and coverage options. Understanding these differences can help individuals choose the type of insurance that best suits their needs.