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Is Term Insurance a Good Idea?

Introduction

In recent times, insurance is gaining popularity in India. There are over two dozen players in this industry and they have a large market in front of them to explore. There are all sorts of insurance products like life insurance, health insurance, vehicle insurance and so on and so forth.

Term Insurance is the most basic and popular form of Life Insurance. This is primarily because, it comes with the assurance of money in case of the untimely death of the person insured. At any time, we cannot rule out the possibility of death for any one whatsoever.

So, buy term insurance plan which gives the assurance of financial security to the near and dear ones, especially if the person is the primary bread earner in the family. The deceased person cannot come back, but the financial worries can be avoided. Thus, a term insurance can mitigate the financial worry and bring some solace and much needed and timely support to the bereaved family members.

Why you should purchase a term insurance?

There are several benefits if you buy term insurance as it makes it popular to the people.

  • A no-frill, basic term insurance is very affordable investment instrument which gives you the term insurance covered and in time of need, that proves to be priceless
  • The premium is very reasonable when the person is young. And once a term policy is purchased, then for the entire term, the premium remains same.  By locking in the premium at an early age, one can get the coverage benefit for long time. Buying a term policy at the age of 22 for a term of 25 years is much cheaper in terms of premium rather than buying policy every 10 years. This is because the premium goes much higher as people grow older
  • In the early career phase when income is comparatively lower and there are responsibilities like mortgage, young family and so on, the budget remains tight. So investing in a term plan is pocket-friendly and covers the risk of eventuality, giving protection to the family. Also, when income increases, term plan could be converted in endowment plan and get the monetary benefit out of it
  • Term insurance is the good option if the person has opted for a big loan (for business, mortgage etc.), because in case the person dies within the term, it covers the death
  • Plain term insurance is simplest form of insurance and the plan is easy to understand by all
  • Every insurance company offers term plan, hence the price is highly competitive. Because of simplicity of calculation, a prospective buyer can check the terms and conditions in offer from various insurers and opt for the best suited one
  • Term plans are very flexible when it comes to exiting the policy. Since no savings component is present, opting out is really simple. Discontinuing the premium payment makes the policy void. Even if the policy was bought for a term of 10 years and premium payment was discontinued after 3 years, after few reminders from the insurer, if no action taken, the policy will cease to exist. In such cases, the policy holder has to either renew it (if the scope still exists) or take a new policy altogether if the person needs the life coverage. This is important to note that after discontinuation, the premium of new policy is likely to be changed (increased in most of the cases since premium is highly dependent on the age of the insured)
  • Tax benefits are applicable for the premium payment under Section 80C of Income Tax Act, 1961. Also if the beneficiary receives sum assured in case of death of the policy holder, the entire amount will be tax free
  • Some insurers have the ‘Renewable’ clause, where the policy could be renewed once the previous policy gets over, without medical tests. This bypasses the need to re-qualify.
  • Some insurance policies have ‘Convertible’ clause by which a term policy could be converted into a whole life insurance policy keeping the sum-assured unchanged. This needs additional premium

 

When the term Insurance is not a good Idea?

  • Term insurance is purchased solely keeping in mind about any eventuality. Hence, if the policy holder outlives the policy term, then there is no return on investment from the term plan
  • Term plan does not act as a saving plan and at the end of the term, there is no return. So it is not counted for specific requirements like marriage, children’s education or to build retirement corpus
  • Term plans become increasingly expensive as you grow older. The steep rise in premium with the advancement of age makes it increasingly difficult to select as a viable option for life coverage. And beyond the age of 60 to 70 (depending on the insurer specification), term plan is not available
  • It does not help in wealth building while the insured is alive
  • There is no surrender value in case of discontinuation. Moreover, policy holder loses the coverage and policy becomes void
  • No loan is approved against term policy
  • Due to health condition, if you become unsuitable for insurance or become un-insurable, then taking a new plan or renewing the existing plan is not possible

 

Conclusion

Like all other financial instruments, term insurance has its own pros and cons. Term insurance works best at the young age when the premium is low and is highly affordable for a young professional with lower income and tight budget. For a young family member, it gives the life coverage assuring financial security to the young family members. Later in life, this term policy could be converted into endowment policy making it an avenue for savings. Again, if someone wants to keep life coverage separate from savings, they can go for other methods of wealth building and maintain the life coverage through ‘plain vanilla’ term insurance.

Sometimes, when you buy term insurance, it does not make much sense when a person grows older. This is because of the steep rise in premium with aging and the requirement pattern changes since the children grow up and do not need financial support any more for their education and other needs. So, beyond a particular age, instead of a term plan, investing in savings plans creates corpus for old age.

However, the same thing does not fit for all.  And people should select the term policy based on their individual requirements, affordability and stage of life to get the maximum benefit out of the term insurance plan.

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