Term Life insurance is basically a type of life insurance policy that offers the insured financial protection for a given period, AKA, the policy term. The coverage one can get is higher when compared to other types of life insurance. This is primarily because a term insurance policy does not necessarily build up any cash value.
Usually, in case of the sudden death of the policyholder during the policy term, his/her policy death benefit would be paid out to their beneficiaries, such as their spouse, kids, or dependent parents. If you are wondering how much life insurance do I need, it’s important to consider that the beneficiaries can use the money to account for the expenses such as meeting outstanding financial obligations and funding future financial goals.
However, it is recommended that before obtaining a term insurance policy, individuals need to weigh the cons and pros of the plan. Read along to gain a better insight into the distinctive traits of the term life insurance.
Major Pros of Term Insurance Plan
Here are the key benefits of a term insurance plan:
Cost-Effective
Term life insurance plans are among the most cost-effective life insurance plans that are available in the market today. The premiums individuals pay on these insurance policies are comparatively much lower and widely considered to be affordable. This is mostly because these plans do not necessarily offer individuals investment components or benefits.
Flexible
Term insurance allows individuals the flexibility to choose when and how they want to pay their policy premiums. Typically, a term life insurance policy offers policy buyers a range of options for paying premiums. For instance, they avail of options like paying the premium monthly, quarterly, or yearly. Based on their preference, convenience, and financial goals, individuals can pick a premium payment frequency that suits them. Individuals can use a term plan calculator to determine which premium payment frequency would be suitable for them.
Ease of Buying
Term insurance policy is widely popular among people, making it accessible to many. The fact that leading insurance providers offer term life insurance policies online has further made it easier for individuals to access the policy. This feature also allows individuals to compare insurance policies, their features, and accompanying benefits to pick a suitable term plan, cover, and premium combination.
Staggered Claim Payout
The policy buyer has the option to choose whether the policy’s sum assured will be paid to their nominee in installments or as a lump sum after the insured’s death. This feature is definitely a major benefit for policy buyers who do not necessarily want the insurance provider to pay them the assured amount at once. They get the option to receive the assured amount in yearly, quarterly, and monthly installments, helping them to account for their financial requirements at their convenience.
Rider Benefits
Term insurance plans allow individuals to customize their policy coverage with add-on riders. Such coverage helps them to extend their coverage and cover for specific clauses through add-ons, such as critical illnesses, accidental death benefits, and the waiver of insurance premiums. The riders can prove helpful for policy buyers and help them protect themselves against certain risks or situations. However, one must note that adding a rider will inflate the insurance premium.
Tax Benefits
Term insurance offers tax benefits under the provision of Section 80C of the Income Tax Act, of 1961. The policy premiums paid in a year are eligible to be deducted from the insured’s taxable income. The upper limit for the deduction is set at Rs. 1.5 lakh annually. Additionally, the death benefit of a term insurance policy is exempted from tax if the accumulated premium amount does not exceed 10% of the policy’s sum assured.
These benefits make term policy a lucrative coverage plan. However, individuals must note that the plan is not devoid of drawbacks, and they should find out about them to make an informed decision.
Major Cons of Term Insurance Plan
Here are the top disadvantages of a term insurance plan:
The policy premium depends on age
The premium for a term insurance policy is dependent on the policyholder’s age. To elaborate, an increase in the applicant’s age increases the premium as well, making it more expensive for older applicants. This is because insurance providers consider older people more risk-prone and likely to die earlier than younger policy buyers. To account for the perceived risks, insurance providers charge policy buyers a higher premium. This is why individuals are often recommended to avail of an insurance policy at an early age and obtain high coverage at a low premium amount.
No investment benefit
A term insurance policy is essentially a pure protection plan that offers the policy buyer comprehensive death benefits. However, its big disadvantage is that the policy does not offer the insured with any maturity benefits or bonuses. Notably, some term life insurance policies may provide individuals with survival benefits but the same is limited only to a few plans. Individuals should know beforehand that a term insurance plan is not actually an investment option and will not necessarily help them to mobilize savings.
Surrender Value
Term insurance allows policy buyers to surrender their insurance policy plan at any time they feel like. However, if individuals do not pay the policy premiums, the insurance policy will lapse. Notably, the surrender value of the policy tends to vary from provider to provider and could also be dependent on the terms. Similarly, some insurance providers may not offer policy buyers a surrender value.
Hence, term insurance policies come with both advantages and disadvantages. Having an idea of both helps individuals make an informed choice and pick a policy that suits their financial goals and coverage requirements.
To make an informed choice, individuals must understand their personal requirements, future obligations, and savings objectives. On the basis of such information, they should pick a plan that fits their budget and helps them meet their goals with ease. They should also find out more about their choice of insurance providers and the quality of service they offer to ensure a hassle-free policy buying and future claim settlement process.
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