Importance Of Term Insurance Policy

Life insurance is a contract between the insurance company and the insured customer in which the insurance company agrees to pay the sum assured in the event of maturity of the policy or on the death of the policyholder in return for a considerable amount called a premium. Term life insurance is a type of life insurance that provides coverage for a specific period. It is called a term because the policy will expire at the end of the term.

The best thing about this type of life insurance is that it is relatively inexpensive and provides coverage for your family’s needs until death or until the policy expires, whichever comes first. If you are looking for protection for your family in case something happens to you, then you should consider getting a term life insurance policy. In this article, we will explain the importance of term insurance and why term insurance is the best choice. We also explain certain myths among the general public regarding term insurance.

What is Term Insurance?

Term life insurance is a type of life insurance that covers you for a set period i.e. 5 years, 10 years, etc. Term insurance policy is designed to protect the financial situation of the family of the deceased in case of the sudden demise of the policyholder. There are different types of Term Life insurance policies available in India.

  • Level Term Insurance Plan
  • Increasing Term Insurance Plan
  • Decreasing Term Insurance Plan
  • Return of Premium Term Insurance Plan
  • Term Plan with Riders

Importance of Term Insurance

There are many reasons why people need term insurance. For example, if you have dependents that rely on your income or if you want to provide for your family in case something happens to you. Term life insurance can also help pay off debts, cover medical expenses, and more. Below are the main reasons of term insurance is the best life insurance plan.

  • Financial Protection: The first and the most important reason to opt for term insurance is the kind of financial protection it provides to your family.
  • Affordable Premiums: You can get a high-value life cover from a term insurance plan by paying an affordable premium amount.
  • Flexibility: Premium payments can be made either monthly/half-yearly/yearly. The earlier you buy a term insurance plan, the lower the premium amount you have to pay.
  • Payout of Sum Insured: In case of the unfortunate demise of the person insured, the family members will receive the sum assured as a payout. The policyholder can choose this payout option as per the requirement.
  • Tax Benefits: You can get tax benefits on premiums paid under Section 80C along with premiums paid towards critical illness benefits under Section 80D. The lump-sum amount received by nominees as the sum assured/death benefit is also exempted from taxes subject to Section 10 (10D) of the Income Tax Act, 1961.
  • Riders: Term insurance offers different riders including money back, critical illness rider, accidental death benefit rider, and waiver of premium in case of critical illness or disability rider to enhance your coverage.

Common Term Life Insurance Myths

Let us debunk the myths regarding the term insurance in the minds of common people:

Waste of Money:

Term insurance is considered a waste of money as people think of it as the benefit received after the death of the policyholder. Most people would be interested to reap the benefits of their investment while they are alive and only a few people think of their families after their death. There are many instances where the family of the breadwinner faced dire financial crunches due to the sudden death of the policyholder without any proper financial security for the family.

Pure-term insurance provides a death benefit to the nominee of the policyholder in case of the death of the insured during the policy period. If the insured survives the policy period, then no survival benefit would be provided to the policyholder in a pure-term insurance policy. A term insurance policy should be taken to safeguard the financial interests of your family. Term insurance is only for protection and cannot be compared with any other investment tool.

For instance, your investments in Mutual funds yield you a return after a certain period, likewise, term insurance provides coverage against death during the policy period for a specified premium. Most people compare life insurance with investments which leads to the poor financial status of the family after the death of the breadwinner.

Term insurance proceedings in the event of the death of the policyholder can act as a liquid asset thereby preventing the family of the deceased from facing a financial crunch where the policyholder is the sole bread earner of the family.

Mr. A and Mr. B are business owners where Mr. A has decided to take a term insurance policy for himself as he is the sole bread earner in the family while Mr. B is the sole breadwinner of the family and doesn’t believe in the concept of term insurance invested the same premium amount in purchasing a piece of land. Both of them have a considerable number of properties such as Houses, Lands, etc. which are considered No liquid assets. It is important to note here that certain expenses are incurred every month by both of them. One bad day Mr. A and Mr. B met with an accident and both of them succumbed to injuries. Mr. A’s family approached the insurance company for the death proceedings and were able to get the claim amount within a month while the family of Mr. B was left to fend for themselves as there was no income after the demise of Mr. B.

Both of the families have properties that are non-liquid assets that couldn’t be sold immediately and converted to liquid assets. Having a term insurance policy helped the family of Mr. A to preserve their properties and also get the liquid amount to run their family for a definite period.

Will take higher cover once my salary is increased:

In India, most people face mid-life financial crises due to poor financial planning in the early stages of their job. When suggested to take a life insurance policy most of us give reasons such as “My salary is low, how can I pay life insurance premium”, “ I will take life insurance once my salary reaches a certain amount”, “ Will purchase a high sum assured policy once I get bonus or hike or promotion” etc.

One must understand that the expenses would be increasing exponentially with your salary and you might find yourself in the same situation a few years later where you would not be able to pay a premium for your life insurance policy. This is called postponement which results in not availing of the life insurance coverage at any point in time. Let us understand the side effects of this situation with an example: For instance, Mr. Robert aged 25 recently joined an MNC company and was approached by a life insurance agent to purchase a term insurance policy. Robert’s income was Rs.5 Lac and accordingly, he was eligible for a life insurance cover up to Rs.50 Lacs. The yearly premium to be paid for the sum assured of Rs.50 Lacs was a meager Rs.8k. But Mr. Robert felt that the sum assured is very less and decided to take the life insurance once his salary is increased.

While traveling to work one day he met with an accident and succumbed to injuries. Since he was not having a life insurance policy, his family was left with no choice but to pick up odd jobs to support their needs. Had he decided to take the life insurance as per his eligibility, after his demise his family would not have faced such situations.

Term life insurance should be taken immediately after taking up a job so that your family would be secured after your demise. There would always be room for another term life insurance policy in case your salary increases in the future and if you feel the need for a higher sum assured.

Once taken coverage cannot be increased:

Term insurance as the name suggests is offered only for a particular period of a term such as 5 years, 10 years, etc. There is a common misconception among people that once the term insurance plan is taken the coverage cannot be increased at a later stage. It is to be noted that few insurance companies offer increasing term insurance plans where the sum assured increases at a certain percentage with the completion of each year.

The sum assured increase would in general be equal to that of the inflation prevailing at that time. There are few term life insurance policies where the midterm revision of sum assured is possible. Insurance companies would ask insured customers to fill out the proposal forms and undergo any medical tests to underwrite the new risk. The acceptance of the proposal to increase the sum assured would rest with the underwriter of the insurance company and the decision would be taken after examining different conditions.

For instance, a person with critical illness history when requesting for enhancement of life insurance coverage may face denial from the insurance company as the risk of death, in this case, is higher. In short, the sum assured in your term life insurance policy can be increased depending on the risk acceptance by the insurance company.

I have company-provided term insurance coverage:

Most employers offer term life insurance to their employees as a part of their entitlements; the coverage may vary depending on the designation of the employees. Top management employees would generally be given higher coverage compared to the bottom-level employees in an organization. The premium for the coverage would be paid by the employer to the insurance company directly and in case of any death claim, the proceedings would be paid to the nominee of the deceased.

There is a myth among people that it is not necessary to purchase a term life insurance policy separately if the employer is offering the term life insurance already. It is to be noted that the employer-offered term life insurance would only be valid till the time you work in the company and expires the next day you resign from the company or the company terminates you. It is highly impossible to get a term life insurance policy in a day or two as there would be many procedures involved before issuing the policy. In case you feel that you would be working continuously and there would be no break in your career, then in that scenario, you would need term insurance after your retirement or if there is any break in between your job switch.

For instance, let us assume that Mr. Max aged 28 is working with an MNC and he was being offered Rs.30 Lacs term life coverage. When he was suggested by his friend to take a term life insurance policy with coverage 15 times his annual income he brushed it off saying that his company is providing him term life insurance and he doesn’t require any extra coverage. Due to the recession, he was terminated from the services of the company and was asked to leave immediately. This left him with no term life insurance coverage and above this, he met with an accident and succumbed to his injuries. Now without a valid term life insurance plan, his family’s financial security is at stake.

I’m Healthy, I don’t need insurance:

Insurance is a protection against financial crisis to be faced by the family of the policyholder in case of the sudden death of the insured. Many people link insurance with illness and are of the wrong opinion that insurance is required for people who fall ill. It is concerning that few people think that they wouldn’t get sick as they are healthy and therefore don’t require any kind of insurance.

This is the wrong perception that needs to be eliminated at the individual level. Covid-19 is an eye-opener for those kinds of people who think that they would not fall sick and therefore don’t require any term life insurance. Being healthy should not be linked with investing in insurance for yourself as a small investment today can help your family tomorrow in a big way.

Insurance companies prefer people with no disease to that person with existing diseases due to the quantity of risk associated. A person with an illness has a higher mortality rate when compared to a person with no existing illness. Life insurance works on the concept of mortality rate, the higher the mortality rate higher would be the premium. This is the reason why the premium is high for higher age groups as the mortality ratio increases with an increase in age.

Term plans cannot be customized:

Term insurance plans are intended to provide the claim in case of the death of the policyholder and this is the basic feature of a term insurance plan. There is a myth among a few people that the term insurance plans cannot be customized as per their requirements. Term insurance plans can be customized by adding the necessary add-ons such as

Term insurance is only needed if I take a loan:

In the case of loan disbursement, financial institutions and banks generally ask for a term life insurance policy with coverage equal to that of the loan amount to be taken by the customer. This is done by the financial institutions to secure their loans against any unforeseen event where the policyholder would no longer be able to pay the loan. Few people are misled that the term life insurance is any loans outstanding. This is completely wrong as the term life insurance is intended to cover your family’s financial situation in case of your sudden demise.

Although it is justified to have a term life insurance policy in case you have an outstanding loan, it is completely acceptable to have a term life insurance policy even though there is no loan. Term life insurance policies are designed to pay a claim to the nominee in case of the death of the policyholder and have no link with the loan availed by the customer.

Buying term insurance is a lengthy process:

There were days when the term insurance policy purchase process would months. This was due to the medical tests involved which are required for the issuance of a term insurance policy. With the advent of technology, the term life insurance policy issuance process has been bought down to as low as 7 days. Now, most life insurance companies are carrying out “tele medicals” where the entire health declaration form the customer is taken by phone, and the life insurance application is processed period.

We at Policybachat help our customers to select suitable term insurance policies and guide them through the process of life insurance policy issuance. Due to the innovation in technology the term insurance issuance policy has been drastically reduced and our team of agents would assist you in every step of your life insurance policy purchase. For the best term life insurance quotes please visit our portal and get the term insurance policy quotes by comparing term insurance quotes from all the top life insurance companies.

Conclusion

Term insurance policy offers protection against the risk of death during the specified period. It offers financial protection to your family against the loss of your income and provides funds to help them maintain their lifestyle in case you die before they reach retirement age.

The main purpose of term life policies is to protect against death or disability. If you want your family to be secured financially if you die or become disabled, then term life insurance is the right choice for you.

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