Know How Term Insurance Works in India
Financial planning is essential in today’s world. It keeps you ready for any financial emergencies. For instance, death is out of anyone’s control. But it’s one’s responsibility to keep finances properly. Such future decisions help your loved ones to live a stress-free life. One of them is term insurance! How does it work?
In this article, we will discuss term insurance policies and benefits.
What is term insurance?
Term Insurance is a type of life insurance or an agreement between two parties. These parties are the insurance company and the insured person. It states that in case of the sudden demise of the insured person, the insurance company must pay the policyholder’s family a specific decided-upon sum. It secures the family’s financial situation in their absence. The policy is for a short period or term. If the insured survives the period, the insured will not receive any benefits. However, you can always renew the Term Life Insurance plan to increase the tenancy of the policy.
What are the eligibility criteria for term insurance?
Most Term Life Insurance policies have minimum eligibility requirements. People between the ages of 18 and 65 can avail of the plans. However, some plans accommodate people reaching age 85 too. The term of the policy can vary from 5 years to 50 years. The sum assured can range from INR 20 lakhs to INR 1 crore. It can also go higher depending on financial requirements.
Different types of Term Insurance Plans
There are various Term Insurance Plans. It helps a lot when you know about them to choose a plan according to your needs.
- Level term plans These are the most basic term plans. The insurance sum is pre-determined, and the insured person’s nominee will only receive the benefits in the event of the insured person’s demise.
- TROP (Return of Premium) plansThese are plans with a maturity benefit. If the policyholder survives the term or the insurance plan period, they will receive the total paid premium back.
- Decreasing term plans In this plan, the sum assured will decrease each year with the decreasing needs of the insured person. It is most suitable for people who already have the responsibility of repaying large loans.
- Increasing term plansThe insured person can increase the sum assured annually while the premium remains at the same value. It is for people whose financial needs are slightly higher than average, and the premiums are also relatively higher than level-term plans.
- Convertible term plans If you are unsure about your financial targets, this plan is for you. With a convertible term plan, you can convert one type of term insurance into another in the future.
How to choose the best suitable Term Insurance Plan?
It is important to differentiate Term Insurance Plans before deciding on a policy. Here are some things to consider:
- Your insurer should have a solvency ratio of 1.5. A solvency ratio is the insurance settlement ratio of the insurer and indicates the success rate of the insurance company in settling insurance plans. IRDAI has also made it mandatory for insurance companies to maintain 1.5 as their solvency ratio.
Why should you consider buying a term insurance policy?
- Low-Term Insurance Premium
A term plan has lower premiums than other insurance plans. You will get the highest death benefit or life cover at the lowest prices.
- Cover for critical illnesses
When we are young, we might not realise the problems and responsibilities our future may hold. We believe that we might never suffer from critical illnesses such as cancer or kidney failure. One reason why we do not give importance to being prepared is. Although a Term Insurance Plan includes only a death benefit, you can always add a rider to increase coverage.
With a rider, the insured will receive a lump sum if diagnosed with a critical illness. This secures them from any financial setback while gathering funds for the treatment.
- Cover for disability and death
Accidents are sudden and do not come with a warning. Depending on how serious the accident is, you might need a significant amount of money saved to cover the medical expenses and compensate for the loss of income. Investing in term insurance will help you deal with such situations.
- Tax benefits
Under section 80C of the income tax act, 1961, you can avail of tax benefits up to Rs 1.5lakh on your Term Insurance Premiums. Moreover, under section 80D of the income tax act 1961, you can claim additional tax benefits for critical illness coverage.
Who should purchase term insurance?
- People in their 20s
When you are young, you are also carefree about the problems your future may hold. However, it is suggested to start early for a stress-free future. Moreover, Term Insurance Premiums are cheaper for people in their 20s since they are less likely to expire.
- Newly married people
If you are newly married, you might want to secure the financial future for your spouse or the children you may decide to have. A Term Insurance Plan will protect your family’s financial future against unforeseen events.
- People approaching retirement
A Term Insurance Plan should be a part of your retirement plan. When you are approaching retirement, you will likely have everything else taken care of. Debts paid, children, settled, although to enjoy the fruits of your lifelong labour. You need to prepare your family against any untoward incident. Avail of a term plan and top it up with additional riders to fortify your retirement plan.
Final thoughts
After reading this article, you might have gained more insights into how term insurance policy works in India and why it is important to get your future insured now. It is best to start planning your policy to have a stress-free future and provide financial security to your family. For more inquiries, you can consult a financial expert like Piramal Finance. We will suggest what’s financially best for you and help take care of your personal loan and insurance policy requirements if any.