Navigating The Path Of 'Do-It-Yourself' Term Insurance: A Guide To Going Solo

Term insurance is a type of life insurance that provides coverage for a specific period of time, usually between five and 40 years. It offers financial protection to your loved ones in the event of your death during the policy term. Term insurance is a simple and affordable way to ensure your family's financial security, with premiums based on your age, health, and life expectancy. The policy has no cash value, and the death benefit is only paid out if the insured dies during the policy term. Term insurance can also be converted to permanent coverage, such as whole or universal life insurance, for a higher premium. It is a good option for those who want substantial coverage at a low cost and can be purchased individually or through a group plan offered by an employer or organisation.

Term insurance vs. permanent insurance

Term insurance and permanent insurance are two types of life insurance policies that offer financial protection to your loved ones in the event of your death. However, there are several differences between the two:

Length of Coverage:

• Term insurance provides coverage for a specific period, often ranging from 10 to 30 years.
• Permanent insurance, as the name suggests, offers lifelong coverage as long as you continue to pay the premiums.

Premium Structure:

• Term insurance typically has level premiums, meaning the payments remain the same throughout the policy's duration.
• Permanent insurance premiums may remain level or increase over time, depending on the specific type of permanent policy.

Cost:

• Term insurance is generally more affordable and has lower premiums than permanent insurance.
• Permanent insurance is more expensive due to its lifelong coverage and additional features.

Cash Value:

• Term insurance does not accumulate cash value, meaning there is no savings component.
• Permanent insurance includes a cash value feature, allowing the policy to build cash value over time, which can be accessed by the policyholder.

Renewal and Conversion:

• Term insurance policies may be renewable, but the premiums will increase with each renewal. Some term policies also offer the option to convert to permanent insurance.
• Permanent insurance does not require renewal and typically has stable premiums.

Ideal Candidates:

• Term insurance is ideal for those who need short-term coverage, are on a budget, or want flexibility in their policy.
• Permanent insurance is suitable for those who require long-term financial protection, wish to create an inheritance for their heirs, or prefer stable premiums.

How to choose a term insurance plan

When choosing a term insurance plan, it is important to consider your needs and budget. Here are some factors to keep in mind:

• Life stage and dependents: Assess your life stage, financial situation, and the number of dependents you have. This will help you determine the level of coverage and policy duration needed.
• Current lifestyle: Be realistic about your spending habits and standard of living to ensure your loved ones can maintain their lifestyle in your absence.
• Income: Analyse your income to determine how much coverage you can afford and how much your loved ones will need in the event of your death.
• Existing liabilities: Consider any debts or loans you have, as your family may be burdened with repayment if something happens to you.
• Add riders: Riders are additional benefits that can be added to your policy for an extra cost. Common types of riders include critical illness cover, accidental death and disability cover, and waiver of premium.
• Claim settlement ratio: Look at the insurance provider's history of settling claims. A higher claim settlement ratio indicates a greater likelihood of your dependents receiving the insurance payout.
• Solvency ratio: This indicates the financial stability of the insurance company and their ability to pay out claims, especially in the event of a natural disaster or other unforeseen event.
• Critical illness cover: Consider whether you are at risk of any lifestyle-related ailments and whether you want your policy to provide a payout for treatment.

Term insurance for parents

Term insurance is a type of life insurance that provides coverage for a specific period of time or years, i.e., a term. This type of life insurance provides a financial benefit to the nominee in case of the unfortunate demise of the insured during the policy term. A term insurance plan safeguards the financial interests of your loved ones in your absence. This single tool can help them cover various expenses like education, housing, groceries and more.

• Financial Security: Investing in life insurance for parents ensures financial security and helps in reducing financial uncertainties like death, disability, and illnesses in the future.
• Death Benefits: In case of your parents’ unfortunate demise, the dependent children will get the sum assured amount. They can use the benefit amount to take care of their monthly expenses.
• Benefit Payout Options: A life insurance policy for parents can offer the benefit of regular income in your post-retirement years.
• Tax Benefits: You can claim tax benefits on the income you will receive as per the prevailing laws of the Income Tax Act, 1961.
• Peace of Mind: Parents feel respected and don’t feel lonely and ignored in their old age. This is very important for them to feel healthy and active, both mentally and physically.
• Age: If you buy an insurance plan at later ages, you will have to pay a higher premium. However, if you plan to opt for a life insurance plan at an early age, the premium rates will be lower.
• Health: Various companies offer the best life insurance for parents over 60, but choosing one is difficult. Below are some of the terms that should be taken care of while buying life insurance for parents over 60 years of age:
• Check for the maximum renewal age i.e., the age till when the policy gets renewed for the life insurance plans.
• Explore if you can avail of increased coverage in the form of riders, critical illness, and more.
• Find the medical centers and hospitals where you can utilize your policy
• Pre-existing Ailments: If someone is suffering from a pre-existing ailment, and it requires medical assistance before the lock-in period, they will not be able to pay for the stated medical expenses through the insurance. So, in the case of life insurance for parents with no medical exam, you are required to provide a declaration of being active and healthy to the company.
• Lock-in Period: This includes the time before which one can determine the funds invested in the plan i.e., called lock period. Always choose a plan that does not offer a long lock period.
• Premium: The premiums of life insurance policy for seniors would be higher than that of younger people. While it is suggested to buy a policy as soon as possible. Also, senior citizens can easily decrease their premiums by ensuring that they are maintaining a healthy lifestyle.

Term insurance for newly married couples

Term insurance is a simple insurance product that offers a sum of money to the family of the policyholder in the event of their untimely death. It is a good idea for newly married couples to consider their insurance needs, as marriage brings additional expenses and responsibilities.

A term insurance plan for couples will provide cover for both partners within the same policy, making it simpler to keep track of and often more affordable than separate policies. When considering a term insurance plan, it is important to understand the different options available to you.

Single Term Insurance Policy

This type of policy is more expensive when compared to a joint policy, as it requires twice the documentation and two separate payouts. It also requires both partners to pay their premiums, otherwise, the policy will cease.

Joint Term Insurance Policy

A joint policy provides cover for two people under one policy and is typically cheaper than two separate policies. This type of policy can be set up in one of two ways:

• First-to-die: This pays out upon the death of the first person. After that, the policy ends, and the surviving partner is not covered.
• Second-to-die: This pays out when both partners have died and is generally used by couples who want to ensure their heirs have money to pay estate taxes.

Advantages of Term Insurance Plans for Couples

There are several advantages to term insurance plans for couples:

• Pocket-friendly: Term insurance plans for couples are offered at a low and affordable price, providing cover for two people with extensive coverage.
• Payout options: You can choose to have a single payout when one partner passes away, or two separate payouts.
• Joint cover: This type of policy provides complete protection for both partners, making it easier to keep track of and saving money on documentation.
• Tax benefits: You can claim tax exemption on the premium paid for a term insurance plan, up to a certain limit.

Tips for Choosing the Right Term Insurance Plan

When choosing a term insurance plan, it is important to:

• Plan together: Both spouses should be included in the planning and discussions about coverage to create peace of mind.
• Compare policies: Compare the details of different policies to ensure you are getting the best coverage for your needs.
• Get a second opinion: Even if you have an insurance agent, it is important to get a second opinion to ensure you are not missing out on critical benefits.
• Understand the requirements: Policies that require medical exams will usually be less expensive than those that do not.

Factors to Consider

There are several factors to consider when choosing a term insurance plan:

• Ownership: Life insurance policies can be owned by individuals or trusts. Trust-owned policies can sometimes avoid triggering a taxable event upon the death of either spouse.
• Coverage amount: How much coverage you need depends on your income, lifestyle, and financial obligations.
• Timeline of financial risk: Consider the specific financial risks and the length of coverage you need.
• Retirement diversification: Review your retirement savings contributions to ensure you are taking advantage of earning the maximum match from your employers.

Term insurance can provide newly married couples with peace of mind and financial stability. It is important to consider your specific needs and goals when choosing a term insurance plan, and to work with a trusted financial advisor or insurance agent to find the best policy for you.

Tax benefits of term insurance

Term insurance is a type of life insurance that provides coverage for a specified term. It offers a large sum of money, known as the death benefit, at a relatively low premium rate. If the policyholder passes away during the policy term, the sum assured is paid to their nominee.

Term insurance offers several tax benefits, which can be claimed for the entire duration of the premium payment term. These benefits are covered under the Income Tax Act, 1961, in India. Here are the key tax benefits of term insurance:

Tax Benefits under Section 80C

The premiums paid towards term insurance plans can provide tax deductions of up to ₹1.5 lakh per year. This includes premiums for life insurance policies, as well as other investments such as PPF, tax-saving fixed deposits, and more. It's important to note that the premium amount should not exceed 10% of the sum assured to claim the full deduction. For policies issued before March 31st, 2012, the threshold is 20% of the sum assured.

Tax Benefits under Section 10(10D)

The death benefit or sum assured received by the nominee is completely tax-exempt under Section 10(10D). This applies to both the base term plan and any additional riders. Additionally, maturity and survival benefits are also tax-free under this section, provided the policy was issued before April 1st, 2023, or the annual premium is less than ₹5 lakhs for policies issued after this date.

Tax Benefits under Section 80D

While Section 80D primarily offers deductions for health insurance policies, it also provides indirect tax benefits for term insurance plans with health-related riders. If the term plan includes critical illness cover, surgical care, or similar riders, deductions of up to ₹25,000 (or ₹50,000 for senior citizens) can be claimed. This is applicable for self, spouse, and dependent children.

Tax Benefits on Term Insurance Riders

Adding certain riders to the base term plan can provide additional tax advantages. For example, including a Critical Illness rider can offer deductions under Section 80D. Similarly, riders like Return of Premium increase the overall premium, allowing for higher deductions under Section 80C.

Frequently asked questions