Are you the head of your family or the only child of your elderly parents? If you are looking to secure your family’s future financially, term life insurance is not a new term for you. But with the increased popularity of this insurance policy, several companies have come up with their own versions of term life insurance, each one with its own pros and cons.
What is term life insurance, and how does it work?
Before choosing the best term life insurance policy, let us understand what this policy is, what it entails and what are the top 5 benefits of term insurance. Term insurance is the policy you purchase for coverage provided for a specific period. This could be 10, 20, 30, or even 40 years. You pay a premium for the period where your policy is active. If you expire during this period, your dependents, which could be your children, spouse, or parents, receive the death benefit, which is a cash payment either given as a lump sum or as a monthly payment.
There are several types of term life insurance policies available for you to choose from, and the biggest difference among them is the monthly premium to be paid. This premium is determined based on your age, gender and overall health. The earlier you get this policy, the lower the premium you have to pay.
If the policyholder survives the policy tenure, he does not receive the death benefit or any other return from the policy, making this policy quite unpopular. To combat this, many companies have now begun to offer policies even up to 100 years of age, with the added benefit of premium return in case of expiration of the policy before the holder’s demise.
Types of term insurance
What confuses most policyholders when looking for term life insurance is the type of insurance to purchase. Here is a compact list of the various term insurances available in the market.
- Convertible term
As the name suggests, this type of policy can be converted from term life insurance to whole life or permanent life insurance. The main difference between the two is that term life insurance provides coverage only for a specific period, while whole life insurance provides coverage for the rest of the policyholder’s life, irrespective of the number of years this entails.
- Increasing term
In this type of term insurance, the policyholder can increase or extend the term of their policy and enjoy the benefits for more years. Although the premium does increase, they do not have to pay the high premiums from an early age, when expenses are high, and savings are very few. The policyholder also does not have to qualify or provide paperwork for another policy, as this policy itself can provide sufficient coverage.
- Annually renewable
In this type of policy, the insurance can be renewed every year once it is close to its expiry date. Although the premium does increase, there is also added death benefit with its renewal each year.
Regardless of the type you choose, the benefits of term life insurance remain the same for all. We will discuss the pros and cons in detail in the next section.
How to choose the correct term life insurance
When there are so many options available to you, it can become difficult to choose the policy that is perfect for you. Therefore, we have weighed some benefits of term life insurance and considered some of the cons, which can help you make your choice quicker and easier.
5 Benefits of term life insurance
- Flexibility in returns
Term life insurance provides you with the exclusive benefit of deciding how you want the death benefit or return from the policy. You can opt for a lump sum of the entire premium that you have paid or ask for monthly payments to better manage your monthly expenses and finances.
- Easy to understand
A term policy is easy to understand. The more the number of clauses in the policy and the finer the print, the more likely you are to get confused. Term policies come with simple clauses and lesser fine print and do not require multiple trips to your accountant to find loopholes.
As there are several options available in the market, there are also different premium amounts for you to choose from. While all premiums depend upon age, gender, overall health, and life expectancy, each company uses its own formula and algorithm to calculate your premium.
Nonetheless, term life insurance has some of the most economical premiums that are affordable for every individual. This is important because it is the amount you will be paying till the end of your policy tenure.
- Saving on taxes
A good policy does not just financially secure you and your family. It also helps you save up on taxes. The death benefits in both section 80C and 80D are exempted from taxes. Term life insurance is one of the few policies that provide these additional benefits, which help lessen the burden on your family after your death.
Term insurance provides the additional benefit of add-ons or riders such as critical illness coverage, accidental death, temporary and permanent disabilities and many more. Most of these riders can be added at low costs and improve the coverage and extent of your policy.
Cons of term life insurance
- No maturity benefits
Most term life insurances do not come with maturity benefits. If you survive the policy tenure, you lose out on the death benefit as well as the return of premium. Although several companies are coming up with the option of return of premium, you have to pay an incredibly high premium every month, which is out of reach of most policyholders.
Most people consider a lack of maturity benefits as a loss of money for the paid premium. This is why few people are opting for term life insurance from an earlier age.
- Lack of motivation
Since term insurance does not provide tangible benefits, most people view the payment of monthly premiums as an unnecessary expenditure and discontinue the payment halfway. For those who look for quick benefits instead of long-term financial security, term life insurance would not capture their interest.
Despite its many pros and cons, term life insurance continues to be one of the most popular and safe choices to financially secure your family in the long run. If you carefully choose your policy, it is always possible to receive maximum benefits as a policyholder.