Once we start earning, the question that faces us is how we use our extra earnings to benefit from them. A savings account seems like a waste of resources, stock markets are too risky, and reading scheme-related documents of mutual funds is time-consuming and tedious. It becomes trickier for those who have people depending on them. In this situation, term insurance seems to be the best way out.
Often known as a pure protection plan, term life insurance provides coverage only for a certain amount of time. It promises a death benefit or financial coverage to the nominee in case of the death of the policyholder during the term of the insurance plan. It is designed to cover your dependents and act as an income substitute in case of an untimely death. Term insurance plans often tend to be the cheapest plans by a considerable amount, which is what makes them attractive to most people.
Benefits of Term Insurance Policies
- Easy to Understand - Term insurance policies are easier to understand than mutual funds, share market’s ups and downs, or NIFTY values, making them popular even amongst the older generation.
- Secure Future of Dependants of the Policyholder - In case of the untimely death of the policyholder, their dependents are in the position to be able to maintain the same standard of living and even start investing if they want to. They don’t need to compromise on their dreams and passions. Therefore, if you take a term insurance policy, you will be able to support your family even if you are not there.
- Longer Policy Period - The tenure of a term plan depends on various factors including the age of the policyholder at the time of purchase of the policy. However, term life insurances offer a long tenure of about 30-50 years as opposed to 10-20 years offered by endowment insurance. The life cover in a term plan is also higher than the life cover in an endowment plan.
- Riders – Riders such as accidental death benefit, critical illness, etc. can always be added with your term life insurance to aid in times of need. This option is more economical than going for stand-alone policies.
- Flexible – The thing which appeals the most to people while considering term life insurance is that you can always change the premium amount with a change in salary. Also, some insurance firms offer increasing term plans in which the assured sum increases with time and decreasing term plans in which it decreases with time.
Four Reasons to Invest in Term Insurance
- Premium Amount of Term Insurance Policy is Low
Premium amount of policies depends on various factors including the age of the person insured. Young people are supposed to be healthy and have much more potential to grow financially. Therefore, the Term Insurance premium amount they pay is less than that paid by older people. Once decided, the premium amount cannot be changed. Also, small sums for longer duration amount to less than what large sums for shorter duration do. So, you who purchased term insurance early on in life will benefit more than your colleague who did it ten years later.
Let’s take a look at an example and see how premium changes with change in the person’s age.
| AGE(as on last birthday) | GENDER | LIFESTYLE | SUM ASSURED | POLICY TERM | ANNUAL PREMIUM* |
|---|---|---|---|---|---|
| 20 | Male | Non-smoker | INR 50 lakh | 50 years | INR 4,148 |
| 30 | Male | Non-smoker | INR 50 lakh | 50 years | INR 5,886 |
| 40 | Male | Non-smoker | INR 50 lakh | 50 years | INR 10,706 |
| 50 | Male | Non-smoker | INR 50 lakh | 50 years | INR 17,432 |
Note: Figures are indicative. It may vary from insurer to insurer and with time.
- Covers Your Family and Dependants Later
Most of the youngsters are aware of their responsibilities by the time they are in their early 20s. They realize that their family is going to depend on them financially in a few more years. This concerns them.
A lot of our worries regarding taking care of our parents, repayment of various loans and other such things constantly run through our mind. Once you get term insurance, these problems can be taken care of to an extent. Death benefits will cover all the expenses, loan amounts, EMIs, and even SIP amounts. Some insurance plans offer monthly income along with a lump sum amount. Therefore, your family can maintain the same standard of living in case of any unforeseen circumstances.
- Chances of Rejection are Very Low
Term insurance claims are rarely rejected. Many life insurance companies had the maximum claim settlement ratio of nearly 99% during the financial year 2018-19. It is better to make sure that if anything happens to you, your family does not have to deal with a financial crisis along with mourning the loss of someone they love.
Some rejections may be due to a variety of reasons including death in the contestability period (1-2 years after purchasing the policy) or non-disclosure of health status. Many companies take time in settling claims of people who die because of health issues. The chances of this happening are less if you are still in your youth.
| LIFE INSURERS | DEATH SETTLEMENT CLAIM RATIO |
|---|---|
| TATA AIA Life Insurance | 99.07 |
| HDFC Life Insurance | 99.04 |
| Max Life Insurance | 98.74 |
| ICICI Prudential Life Insurance | 98.58 |
| Life Insurance Corporation | 97.79 |
| Reliance Nippon Life Insurance | 97.71 |
| Kotak Life Insurance | 97.40 |
| Bharti Axa Life Insurance | 97.28 |
| Aditya Birla Sun Life Insurance | 97.15 |
| Exide Life Insurance | 97.03 |
- Enjoy Tax Benefits
Term life insurance is looked at as an investment rather than an expenditure. Certain tax exemptions are granted to the policyholders.
Under section 80C(2) of the Income Tax Act, 1961, premium amount is deducted from the income of the person insured before arriving at taxable income, that is, tax isn’t levied on the premium amount . The maximum sum that can be claimed as deduction under this provision is INR 1.5 lakh provided that certain terms and conditions are abided to.
Section 10(10D) of the same act allows the death benefits to be exempted from tax under the condition that total premiums paid does not exceed 10% of the sum assured during maturation of the policy. Chances of this happening are less if the policy is taken on early in life.
Section 80D serves the purpose of tax exemption towards premium paid towards health-related riders on insurance policies.
No one likes a few thousand rupees to be taken out of their salary each month before they even get to see it. However, one must remember that this amount is like gold kept in a locker; not usable but at your disposal when needed. Ensuring your family’s well-being is your duty towards them and it is always better to be five years too early than five minutes too late.
