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What is Term Insurance? Why should one buy Term Insurance?

What is Life Insurance?

It is a contract that offers financial compensation at the time of death or disability of the life insured. Furthermore, Life insurance are categorized as follows:

·         Term Insurance

·         Whole life Insurance

·         Endowment Policy

·         ULIP’s

·         Money-back policies

·         Pension Plans

What is Term Life Insurance?

According to Investopedia, Term Insurance is a type of life insurance that provides coverage for certain period or a specified “term” of years. If the insurer dies during the time period specified in the policy and the policy is active, or in force, a death benefit will be paid. 

Term insurance is much less expensive in comparison to the permanent life insurance.

Types of Term Plans

Before buying a Term Life Insurance policy one must also understand the different types of policies being offered. Some of the types are mentioned below:

1.    Pure Term Plan

It is the most common type of term life insurance policy. The premium and coverage under this type will remain constant in the entire tenure and the benefits will be paid on the demise of the policy holder and if the policy holder survives the tenure of the policy the policy holder gets nothing.

2.    Return on Premium Plans

Unlike Pure Term plan, this plan comes with maturity benefit where the total premium paid will be returned to the insured if he/she manages survives the policy tenure.

3.    Increasing Term Plans

In these plans, the policyholder can increase the sum assured annually during the policy tenure, while paying the same premium. Due to this reason these plans, premium of these plans is generally higher compared to other types of Term Plans.

4.    Decreasing Term Plans

Unlike the Increasing Term, the sum assured reduced annually in the plan to meet the decreasing insurance requirement of the life insured.

5.    Convertible Term Plans

These plans come with an option where the policy holder can convert his term plan to any other type of plan at a future date.

6.    Term Plan with Riders

This a type of plan with rider options such as accidental death cover, critical illness covers etc. which can be purchased along with the normal term plan

(Source: Policy Bazaar)

Benefits of buying Term Insurance

Below mentioned are some of the benefits of buying Term Insurance:

·         High assured sum at Affordable premium:

Term Insurance is one of the simplest forms of life insurance. The primary benefit of term insurance is that it is available at an affordable cost. Another important term insurance benefit is that the earlier you buy term insurance, the lower will be the premium. 

·         Easy to understand

When buying life cover insurance, some of them might find the insurance terms a bit complicated about various life insurance policies. The main feature of term insurance is that it is less complicated and easier to understand.

·         Income Tax Benefits

Term Insurance plans also provide tax benefits. While the premium which is paid for a term insurance policy is tax-deductible, the payout also comes with tax exemptions as per the existing laws.

·         Return of Premium option

A pure term insurance plan offers payout only on the event of demise of the life insured and does not provide any benefits on maturity of the policy. However, the life insured can get maturity benefits by opting for return of premium.

·         Protection to Dependents

Term Insurance plays an important role in times of crisis. It provides protection to the dependents of the deceased to tackle finances that may come upon them. The benefits of the policy are paid to the nominee either lump-sum or monthly installments, which can be chosen when buying the term policy.

How much Life Insurance to buy?

Like financial planning, one aspect comes where you need to plan how much life insurance to buy or how much is enough.

Before buying life insurance one must consider some factors which are listed below:

·         Current Income

·         Liabilities

·         Financial Goals

For buying life insurance one must go with this thumb rule as it comes handy to understand how much life insurance coverage is required. Experts suggest it better to have insurance cover equivalent to 7 to 10 times of current income. The inflation rate in India is higher compared to other countries, that’s why experts suggest it is better to have insurance coverage worth 10 to 15 times of current income.

 Note: Please refer to the Terms & Conditions before buying any Term Insurance Plan

 (Blog written by AbdulRahman, Intern, Barakah Finserve)

DISCLAIMER:  THIS BLOG IS FOR INFORMATION AND NOT TO SOLICIT ANY BUSINESS.  ALTHOUGH BEST EFFORTS ARE MADE TO ENSURE THAT ALL INFORMATION IS ACCURATE, OCCASIONALLY UNINTENDED ERRORS AND MISPRINTS MAY OCCUR.  IT IS VERY IMPORTANT TO DO YOUR OWN ANALYSIS AND SEEK PROFESSIONAL ADVICE BEFORE MAKING ANY INVESTMENT BASED ON YOUR PERSONAL CIRCUMSTANCES. MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS; READ ALL THE SCHEME RELATED DOCUMENTS CAREFULLY. THE PAST PERFORMANCE OF THE MUTUAL FUNDS IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE OF THE SCHEMES. BARAKAH FINSERVE LLP OR ITS STAFF WILL NOT BE RESPONSIBLE FOR ANY LOSSES ARISING OUT OF ANY INVESTMENT DECISION YOU TAKE