Seven Things to Know Before Taking Term Life Insurance

Insurance is an essential step in your financial plan to help you lead a secure life in terms of money. Having insurance is ideal, especially for people who are the breadwinners of their families.

It will allow you to provide a secure future for your family even if you are not around. By the end of this article, you will be aware of everything you need to know before buying your ideal term life insurance.

While there are many types of life insurance, they can all be majorly classified into three categories.

• Permanent life insurance, which is also known as whole life insurance
• Term life insurance
• Variable universal life insurance

This article will discuss one of the most common types of life insurance, term life insurance.

Some people consider it a form of protection, while others think it’s not very beneficial, but the fact is, in a life of uncertainty, one cannot ignore the need for term life insurance.

So what exactly is term life insurance? Let’s find out:

What is Term Life Insurance?

The word “insurance” is derived from the word “assurance” or “guarantee.” In terms of banking, term life insurance is a type of life insurance where an insurance company guarantees payment when the covered person passes away in the specified period.

If the policy expires, the policyholder can either terminate it, renew it for an additional term, or convert it into permanent coverage.

How does term life insurance work?

For those new to topics like insurance, a fundamental question that might come to mind is “how does the process work?”.

Let’s take a simple example. Suppose you want to buy a term life policy. The first thing you do is analyze different policies that you think might fit your criteria.

1. There will now be an agreement between you and the insurance company. The latter will promise to pay your beneficiaries an agreed amount in case of your unfortunate demise during the policy duration.
2. If you’re taking a life cover of 1 crore till you’re 60 and pass away before the age of 60, the insurance company will pay your family the agreed amount.
3. In return for this security, you pay a small amount annually, semi-annually, quarterly or monthly to the insurance company until you are 60. In financial terms, the amount you pay is known as a “premium.”

In this way, you ensure that your family’s financial requirements are taken care of, even after your demise.

A few things to keep in mind:

• The insurance rates are based on your life expectancy, which the company determines based on your lifestyle and health history. Life insurance will cost much less in your 20s than in your 30s or 40s.
• Fortunately, if you outlive the term, your insurance ends. This means you will have to renew the insurance for future periods if you want the insurance to continue. Although, as mentioned before, the premiums will now cost a lot more due to the age factor.

Types of Term Life Insurance

We all have different financial goals and additional requirements. What might cater to your needs might not necessarily work for someone else. Keeping this in mind, various life term insurance products are crafted to fulfill different requirements.

Here, we’ll be discussing the significant types of term life insurance-

• Level Premium: It’s the most basic form of term life insurance. The concept is simple. The insuree pays the annual premiums till the end of the policy. In the event of the insured’s death, the insurance company will pay the assured amount to the insured's family.
• TROP (Return of Premium): A trending term life insurance wherein the insuree will receive the premium paid after the policy’s tenure. The fundamental difference here is that your annual premium will be higher in TROP than the level premium because of its benefit.
• Increasing Term Plans: This type of term life insurance allows the insuree to raise the premium, which has to be paid annually. This automatically increases the cover compared to the level term plan.

The Advantages of Term Life Insurance

1. High Sum Assured at a Low Premium

The primary benefit of term life insurance is the affordable cost at which you can buy it. Compared to other life insurance policies like permanent life insurance, universal life insurance, and others, term life insurance is more affordable due to the cheap premiums.

Another benefit we have discussed before is that the earlier you purchase term life insurance, the cheaper the premium will be.

An essential factor to note is that your term insurance plan will be cheaper if you buy it online rather than offline. Moreover, it is also easier to check and pay the premiums. Just one click or touch, and you’re done!

2. Easy to understand.

Term life insurance is prevalent because of its simplicity. The policies are easier to understand compared to the convertible life insurance plans. I can’t stress enough how essential it is that you understand a policy before purchasing it. The fact that term life insurance is easier to understand makes it beneficial.

3. Multiple Death Benefit Payout Options

Most urban citizens today have various loans. It can be a car loan, a home loan, or a personal one. In an unfortunate demise, this loan transfers to the family, who will have to bear the cost.

Having term life insurance assures you that your beneficiary will not have to bear the burden of these loans. You can either choose a lump sum payout, which is the most common option or go for a monthly payout so your family can live their life without being anxious about the loans and other expenses.

4. Additional Riders to Strengthen the Policy

Term insurance policies have riders that you can select to supplement the core term insurance benefits. You can include these riders in your policy by paying a small additional cost.

Also known as “add-ons,” the additional riders are a great way to make your cover robust. In addition to the primary term policy benefit, you can choose to avail of multiple add-ons such as payout in case of terminal illness, accidental cover, or paralysis.

Your insurance company will offer you financial assistance in such unfortunate circumstances by giving you a lump sum. It won’t be as huge as your cover, but it will be enough to sustain you. In return, you pay nominal charges along with your premium.

5. Income Tax Benefits

Term insurance policies also offer tax advantages. While the premiums you pay for a term insurance plan are tax-deductible, the payouts are tax-free under current tax legislation.

If you want to save yourself from heavy taxes legally, term life insurance is a great way. The term insurance benefits are covered under Section 80C and Section 10D of the Income Tax Act of 1961.

Now that we’re clear about term insurance, its benefits, and its various types, let’s understand the seven essential things you must know before buying term life insurance.

7 things to know before taking term life insurance

This will help you choose the best term life insurance policy based on your requirements.

i. Don’t mix up your insurance with investments.

A widely prevalent financial mistake that many people make is considering life insurance as an investment tool. Your life insurance is like a house that protects you from the rain of uncertainty and unfortunate events. It saves your money!

Whereas your investments will help you grow your money and achieve the financial goals you aspire to. Since the risks are higher, the returns are also greater.

While the purposes of the two are inherently different, they are both essential for a healthy financial plan.

ii. Calculate your coverage and factor in inflation.

Before buying a term insurance plan, you need to analyze how much cover your family will require to sustain their lifestyle and financial needs in case of your untimely death.

Please consider all your loans, be they home loans, educational loans for your kids, car loans, or personal loans.

Also, consider the emergency funds, medical expenses, and future educational goals. Most importantly, a factor that many people miss is not calculating inflation.

iii. Premium Frequency

Take into consideration how frequently you can pay the premiums. All the ideal life insurance companies offer a range of payment frequencies, including annually, semi-annually (6 months), quarterly (4 months), or monthly. Choose the one that is most suitable for you.

iv. Life Insurance riders

Irrespective of which policy it is, because our requirements are different and change from time to time, there is no “fit-all-needs” policy. This is where riders come in handy.

As explained above, these add-ons give an added layer of protection to your coverage plans. Hence, it is wise to consider them before buying your term insurance plan.

v. Compare, analyze, and then decide.

Once you have reviewed all the points mentioned, compare the different policy plans. It can be any ideal insurance policy but choose one after critically assessing your options because your term life insurance is part of your long-term financial plan.

Hurrying the process can backfire. Therefore, it is advisable to be patient, thorough, and mindful.

vi. The duration of your insurance policy

Some term insurance plans have 20 years of tenure, while others offer 10, 25, or other options based on your requirements. This is critical to consider because the longer your duration is, the more expensive it will be.

Therefore, you should choose wisely so that you don’t miscalculate and risk policy lapse.

vii. Mention all your details.

Have you heard the term “utmost good faith?” Insurance contracts are probably one of the most accurate forms of good faith. This legal agreement requires you to be as honest as possible and mention every detail.

If you include anything that you cannot prove or miss out on an important detail, you will be putting the whole insurance policy at risk. Insurance companies have legal rights to terminate the contract without offering any benefits if you are not acting in your “utmost good faith.” Hence, I advise you to put down every detail as carefully as possible.

Frequently Asked Questions (FAQs) about Term Life Insurance

Below are some of the most common FAQs on term life insurance. Learning about these will allow you to pick the best term life insurance policy based on your needs.

1. When is the right time to buy term insurance?

As we have mentioned above, one of the benefits of a term insurance plan is that the earlier you start, the lesser premium you pay. This is based on simple math: the longer your duration is, the lower your premium will be.

Hence, starting as early as 22–25 will maximize your benefit.

2. What documents should I have to buy a term insurance plan?

As mentioned above, the legal agreement of life insurance is of the utmost good faith. But it also requires some documents through which you can prove your identity and make other claims.

Usually, an insurance company asks for

• Address Proof
• Identification with a photograph
• Passport-size photos
• Income Proof
• Age Proof

3. Who should buy a term insurance plan?

A term insurance policy is an ideal financial tool for anyone who has dependents and wants to ensure that their beneficiaries have a safe and sound future in terms of financial needs.

This generally includes anyone who is a professional, parents (single or couple), individuals whose parents are dependent on them, taxpayers, and anyone who wants to leave behind a legacy of financial security.

4. How to change my term insurance policy details?

An ideal insurance company will offer you a chance to change your details after filling them in. However, once you’ve purchased the plan, you won’t be able to change any of the points. Therefore, it is considered safe practice to thoroughly check whatever you put in the policy details.

As for changing the policy plans, if your term life insurance is flexible, like the increasing or decreasing term plan or a convertible one, you will have the option to change your policy plan after a tenure of a few years.

This is so that you can reconsider whether to go with the current plan or change it based on your requirements.

End Notes

This leads us to the end of the article. I hope this helped you in your quest to understand everything you need to know about a term policy plan. Please feel free to contact us if you need any further assistance.

We’ll be happy to help you select the best term life insurance policy. Please take care and be safe!