Term Insurance is a must-have in your financial portfolio. Here’s why.
What comes to your mind when you think of financial planning? For most people, financial planning means earning enough; saving for retirement; and keeping money aside for significant expenses, investing in mutual funds, shares, and bonds. Many people ignore planning for the needs of their families in the event of them not being around. For that, they depend on their retirement savings. But is it a good idea to do so? More importantly, would that amount of savings be enough to meet rising expenses?
Experts believe that individuals must include term insurance as a part of their financial planning. Term insurance is a type of life insurance plan for a specific period. It is purely a death benefit type of plan, meaning the benefits of term plans are available only when the policyholder dies. It covers death risk and pays a lump sum death benefit to the beneficiaries of the insured. If the insured survives the policy period, no benefit is given, other than in the case of a premium return policy. In premium return term policy, the policyholder receives an aggregate of all the premiums paid or, as mentioned in the policy terms and clauses. Term insurance is purely a financial security tool for the dependents of the policyholder. It is most useful to families that have a single earning member.
It ensures the financial security of the policyholder’s family members
Term insurance is not for earning returns but rather for the financial protection of the policyholder’s family members. E.g., Rajesh is a sole earning member of his family, which includes his parents, his wife, and two children. He bought a term insurance plan of the sum insured Rs 1.5 crore when he was 35 years old for a term of 30 years. This means that if Rajesh dies before the 30 years are over; his family would receive Rs 1.5 crore either as a lump sum amount or in regular installments (as chosen by the policyholder).
This amount of Rs 1.5 crore would ensure that Rajesh’s family’s financial needs are met to some extent. Moreover, if Rajesh has any debts (loans, borrowings), they can be paid off with the help of the term insurance payout. Imagine if Rajesh didn’t have a term insurance plan but depended on personal savings and investments for his family’s financial security.
Firstly, Rajesh may not have been able to save a considerable sum of Rs 1.5 crore. Secondly, investments in mutual funds and shares depend on market fluctuations and do not provide complete surety. By buying a term insurance plan, Rajesh has secured his family financially.
Term insurance payout can address multiple financial needs
The policyholder’s family can utilize children’s higher education, children’s wedding, medical expenses of aged parents, debts, and loans – term insurance payout for multiple financial needs.
The sum insured payout can also be utilized as a corpus that can earn interest and a regular income. Whether for planned expenses or unplanned emergencies, the sum insured payout can be used for different purposes. Moreover, it can ensure that a family can maintain its lifestyle after an earning member passes away. It is thus an essential element of financial planning for families.
Term insurance helps achieve long term goals
Life is uncertain. No one knows what’s going to happen in the future. But individuals still plan and make long term goals. Buying a house, moving to a different country, starting a new business – these long term goals can be achieved with the help of term insurance plans of a family.
Tax benefits of term insurance
Tax saving is a crucial part of financial planning. Many people invest in tax saving instruments such as life insurance, medical insurance, and other tools only to save tax. Let’s understand how term insurance can help save tax and how it matters to one’s financial plan.
Policyholders can avail of tax deductions on the premiums paid for term insurance plans. Term insurance policyholders are eligible for tax benefits of up to Rs 1.5 lakh in a financial year. The premiums paid for term insurance plans for self, spouse, and dependents are considered and eligible for tax benefits.
There are three ways to benefit from tax benefits for the premium paid for term insurance:
Section 80 C
Premiums paid for term insurance plans are eligible for tax benefits of up to Rs 1.5 lakh under Section 80 C. However, the following points should be considered:
- The annual premium for the term plan should not exceed 10% of the sum insured. If the premium exceeds 10% of the sum insured, then the tax benefits are calculated proportionately.
- It should be noted that the above rule differs for policies bought before March 2012. The tax benefit is applicable if the premium does not exceed 20% of the sum insured.
- If policyholders surrender the policy within two years of purchasing the policy, they are not eligible for tax deductions.
Section 10 (10D)
Under Section 10(10D), the policyholder can avail of tax benefits if the premium for the policy is less than 10% of the sum insured.
If a policyholder dies before the maturity period, the sum insured payable to the nominees is entirely tax-free under Section 10 (10D).
Section 80 D
If there are any riders included in your term insurance, such as surgical care, hospital care, critical illness, among others, you can avail tax benefits of up to Rs 25,000.
A term plan offers a large sum insured for a lower premium
Compared to other investment tools, term plans are much affordable and cheaper. One can buy a term plan for an annual premium ranging between Rs 8000 and Rs 18,000 for a Rs one crore sum insurance policy. Moreover, term plan premiums are fixed, which means they (typically) do not increase, and inflation or other market factors do not have any effect on it. Here’s a table that shares the premium amount for different term periods for a Rs 1 crore term plan.
Different types of term plans to choose from
Although term insurance is a simple and straightforward instrument, the insurance market offers different term plans to suit different needs. Here are the different types of term plans:
- Level term plans – The simplest type of term insurance, Level Term Insurance plans, has a fixed sum assured and payout to the nominee upon the policyholder’s death.
- Return of premium plans – Return of Premium Term plans provide maturity benefit to the policyholders if they survive till the maturity period. The insurer pays back a pre-specified premium amount to the policyholder. However, if the policyholder dies, the sum insured is paid to the nominees. This plan is a good option for individuals who want financial security for themselves.
- Increasing term plans – In Increase Term Insurance plans, the sum assured increases at an annual frequency. In this case, the payout sum insured is of the year in which the policyholder passes away. This type of term plan is advantageous as it can keep up with the rate of inflation. Hence, the policyholder can ensure an adequate sum insured for the dependents.
- Decreasing term plans – In Decreasing Term Insurance, the sum assured decreases at an annual frequency. These types of plans are usually beneficial for those who have outstanding loans. The sum insured is aligned to the outstanding loan amount, which decreases every year. In this case, the payout sum insured is of the year in which the policyholder passes away.
- Convertible term plans – A convertible term insurance plan allows the plan to be converted to another plan, e.g., an endowment plan or a full life insurance plan. Such a plan provides more flexibility and room for changes to the policyholder.
- Term plans with riders – Term plans with riders provide the option of buying riders such as critical illness cover, accident cover, or disability cover. Such plans offer supplementary coverage and additional benefits.
- Group term insurance plans – Just like group health insurance, group term insurance plans can be bought for a group of people. If any of the group members die, the sum insured is paid to the family members of the deceased.
Have you made up your mind about buying a term plan for yourself, meaning for your family? Well done! Get started early to reap the benefits.
FAQs: Term Insurance
What are the benefits of term insurance plan?
There are many benefits of term insurance. Term plans offer competitive pricing. The premium remains constant for starters, unlike in other policies such as health insurance, where it may change with time and age. Term insurance is also one of the more affordable types of life insurance.
Term life insurance provides flexibility. They can be discontinued at any time. If the policyholder stops paying the premium, the policy gets terminated. Many term insurance policies offer facilities to renew and convert. Renewability allows the policyholder to continue the policy once it reaches its maturity period, while convertibility enables the policyholder to convert the term insurance policy to another type.
They provide financial security for dependents. Term insurance is genuinely designed as a tool for the financial security of the policyholder’s dependents. It gives peace of mind to the policyholder and the family members.
Which are the best companies for term insurance?
Many insurance companies in India offer term plans without medical tests. Some of the insurance companies to consider are ICICI Prudential, PNB MetLife, HDFC Life and Future Generali, among others.