Understanding The Total Benefits Of Life Insurance

Term life insurance is a type of life insurance that provides financial protection for a set period of time. If the policyholder passes away during this time, the insurance company pays a death benefit to the beneficiary. The main goal of life insurance is to offer financial security to the policyholder's family. There are two main types of life insurance: pure life cover, known as term insurance, and life cover with a savings component, called endowment insurance.

Term life insurance is usually the least costly life insurance available because it offers a death benefit for a restricted time and doesn’t have a cash value component like permanent insurance. Term life insurance is attractive to young people with children. Parents can obtain substantial coverage for a low cost, and if the insured dies while the policy is in effect, the family can rely on the death benefit to replace lost income.

Term life insurance is also well-suited for people with growing families. They can maintain the coverage needed until their children reach adulthood and become self-sufficient. The term life benefit may be equally useful to an older surviving spouse. However, premiums for people who wait until they are older to apply for insurance will be higher than if they’d gotten a level-term policy when they were younger.

Each insurance company sets a maximum age for its term life insurance coverage, which usually ranges from about 80 to 90 years old. Term life insurance is a good option for people who cannot afford or will not pay the much higher monthly premiums associated with whole life insurance.

Term life insurance explained

Term life insurance is a type of life insurance that provides coverage for a specific period, usually between one and 30 years. It is a contract between the policyholder and the insurance company, where the policyholder agrees to pay premiums in exchange for a guaranteed death benefit to their chosen beneficiaries when they die. This benefit is typically paid out as a lump sum and can be used to cover funeral costs, debts, or other financial losses. Term life insurance is a popular option for people who want substantial coverage at a low cost, as it is usually more affordable than permanent life insurance.

When you buy term life insurance, the insurance company determines the premium based on factors such as your age, health, and life expectancy. The premium amount can vary depending on your gender, age, health history, and lifestyle. The policyholder is responsible for making these payments, and in return, the insurance company agrees to pay the death benefit if the insured person dies during the specified term. If the insured person survives the term, there is no payout, and the policy expires.

Types of Term Life Insurance

There are several types of term life insurance available:

• Level Term Insurance: This is the most common type, offering a fixed sum assured and level premiums throughout the policy term.
• Increasing Term Insurance: The sum assured gradually increases over the policy term to offset the effects of inflation.
• Decreasing Term Insurance: The sum assured declines over time, tailored to individuals with specific financial obligations, such as loans.
• Term Insurance with Return of Premium (TROP): If the policyholder survives the policy term, the total premiums paid will be refunded.
• Convertible Term Insurance: This type allows policyholders to convert their term plan into an endowment or whole life policy at a later stage.

Benefits of Term Life Insurance

Term life insurance provides several benefits, including:

• Financial protection for your family: It ensures your family receives financial support to maintain their lifestyle and meet future financial needs in your absence.
• Protect your assets: It can help your family retain their assets, such as property or vehicles, that may have outstanding loans against them.
• Coverage for critical illnesses: You can add a critical illness rider to your term insurance plan, providing financial protection against life-threatening ailments.
• Tax benefits: Term insurance plans often offer tax relief on premiums and death benefits.
• Multiple payout options: You can choose how your beneficiaries receive the death benefit, such as a lump sum or in installments.

Who Should Consider Term Life Insurance?

Term life insurance is suitable for people at various life stages, from young professionals starting their careers to those in their late 40s and 50s planning for retirement. It is a good option for those who want high coverage at a low cost, as the premiums are generally lower compared to other types of life insurance. However, it is important to note that term life insurance does expire, and if you outlive the policy term, there is no payout.

Whole life insurance vs term life insurance

Whole Life Insurance vs. Term Life Insurance

When choosing a life insurance policy, it's important to understand the differences between whole life insurance and term life insurance to determine which one best suits your needs. Here's a detailed comparison to help you make an informed decision:

Coverage Period:

• Whole Life Insurance: Provides coverage for your entire life. It is a lifelong commitment, and the policy remains in force until you pass away.
• Term Life Insurance: Covers you for a specific term or a set period, usually ranging from 10 to 30 years. You can choose the term length based on your unique situation.

Premiums:

• Whole Life Insurance: Typically has higher premiums because it serves as an investment and accumulates cash value over time. The premiums remain the same throughout your life.
• Term Life Insurance: Generally more affordable and costs less than whole life insurance. The premiums may vary depending on age, gender, and medical history but are usually fixed for the term.

Death Benefit:

• Whole Life Insurance: Offers a guaranteed death benefit that is paid out to your beneficiaries regardless of when you pass away. The benefit amount remains the same unless there is an outstanding loan against the policy's cash value.
• Term Life Insurance: Provides a death benefit if the policyholder passes away during the specified term. If you outlive the term, there is no payout, and your coverage ends.

Cash Value:

• Whole Life Insurance: Has a cash value component that grows over time, tax-free. You can borrow against this cash value or surrender the policy for cash. The cash value and death benefit are linked.
• Term Life Insurance: Does not have a cash value component. There is no investment or savings element, and the policy does not accumulate cash value.

Complexity:

• Whole Life Insurance: More complex due to the cash value component and the potential for changing death benefit amounts if there are outstanding loans against the policy.
• Term Life Insurance: Straightforward and simpler as it provides fixed premiums and a fixed death benefit with no investment component.

Suitability:

• Whole Life Insurance: Suitable for those seeking lifelong coverage, wanting to build cash value over time, and who can comfortably afford the higher premiums. It is often chosen for end-of-life planning and providing an inheritance.
• Term Life Insurance: Ideal for those who only need coverage for a specific period, such as during their working years, children's schooling, or covering a mortgage. It is also a good choice for those seeking affordable coverage and who may not require lifelong protection.

Premiums and payouts

Term life insurance is a type of life insurance that provides coverage for a specific period of time, usually between one and 30 years. If the policyholder dies during the policy term, the insurance company pays a death benefit to the beneficiary. The death benefit is a lump-sum payment made to the designated beneficiary and can be used to cover funeral costs, debts, or other financial losses resulting from the death. The beneficiary can also choose to receive the death benefit in installments or convert it into an annuity.

Term life insurance premiums are the payments made by the policyholder to the insurance company to maintain their coverage. The premiums are usually paid on a monthly, quarterly, or annual basis and remain fixed for the length of the policy. The premium amount can vary depending on factors such as age, gender, health history, and lifestyle. The insurance company determines the premium based on the policy's value and factors such as age, gender, and health. In some cases, a medical exam may be required to assess the policyholder's health and calculate the premium accordingly.

Term life insurance policies typically do not accumulate a cash value, and there is no payout if the policy expires before the policyholder's death. However, some term life insurance policies offer a return of premium feature, where the total premiums paid will be refunded if the policyholder survives the policy term. Additionally, term life insurance policies are often convertible, allowing policyholders to convert their term policy into a permanent life insurance policy within a specified period.

When choosing a term life insurance policy, it is important to consider the different types available, such as level term insurance, increasing term insurance, and decreasing term insurance. Level term insurance offers a fixed sum assured throughout the policy term, while increasing term insurance gradually increases the sum assured to offset the effects of inflation. On the other hand, decreasing term insurance is tailored to individuals with specific financial obligations, such as loans, and the sum assured declines over time.

It is also worth noting that term life insurance is generally the least costly option compared to permanent life insurance. This is because term life insurance offers coverage for a restricted time and does not have a cash value component. However, the cost of term life insurance can vary depending on factors such as age, gender, and health, and it is important to compare rates from different insurance companies to find the best option.

Riders and add-ons

Riders are additional coverage options that can be added to a life insurance policy to customise it and provide more protection for the policyholder. Riders are not the core policy itself but can increase the value, flexibility or features of a policy. Riders can be included in policies to make them more attractive to buyers.

• Accidental Death Benefit Rider: This provides an additional death benefit if the insured passes away due to an accident. This type of coverage pays out regardless of any existing health conditions and is triggered by an unexpected incident, such as a car crash.
• Children's Rider: This provides coverage for minor dependents of the policyholder and can be added to an existing policy, typically with benefit amounts ranging from $1,000 to $25,000. Companies typically charge just one insurance rate to add this rider for any number of natural or adopted children through the age of majority.
• Long-Term Care Rider: This provides coverage for the cost of long-term care services. This rider pays out a specified amount each month to cover the expenses related to custodial or assisted living care, home health aides or adult daycare programs.
• Critical Illness Rider: Almost all the best-term insurance policies offer Critical Illness Riders. This is also one of the highly recommended add-ons by term insurance experts. The insurer will provide a list of critical illnesses and offer a lump sum if the policyholder is diagnosed with any of them.
• Waiver of Premium: If the policyholder is diagnosed with a critical ailment or is left permanently incapacitated following an accident, this rider waives off any future premiums to be paid towards the term insurance plan. Thus, the policyholder can continue enjoying insurance protection without spending a penny.
• Accidental Total and Permanent Disability Rider: This rider kicks in if the policyholder has lost both legs and/or both arms, both eyes or one leg and one arm. Based on the insurer and the plan, the perk can be offered as a waiver of premium or as the disbursal of a lump sum.
• Life Stage Benefit Rider: This rider offers a significant bump in the cover amount up to a capped limit during major life-stage events like weddings, childbirth/adoption, home loans, etc.
• Increasing/Decreasing Cover Option: A standard term insurance policy does not allow adjustments to the coverage amount. However, riders like the Increasing Cover Option or Decreasing Cover Option can help increase or decrease the cover amount.
• Return of Premiums: If the policyholder survives the policy tenure, the insurer reimburses their accrued premiums (not including the premium for riders and GST).

Eligibility and entry age

Term insurance is a type of life insurance that provides a lump-sum payout to the policyholder's family in the event of their untimely death within the policy term. Anyone of legal age with dependants can purchase term insurance in India, and the minimum age to buy term insurance is typically 18 years. The maximum age varies by insurer but is usually 65 years. Some insurers may offer coverage up to 99 years of age.

Term insurance is available to those aged 18-65 years, with the option to renew after the maturity date, although this will be at a higher cost. The age of the policyholder is a crucial factor in premium calculation, with older individuals typically paying higher premiums due to increased health risks.

It is beneficial to purchase term insurance at a younger age as the premiums tend to be lower, and the policyholder can take advantage of higher sum assured options. Additionally, buying term insurance early provides flexibility in changing the plan and adding riders.

Term insurance is also available to Non-Resident Indians (NRIs) who can submit acceptable proof of residential status. The eligibility criteria and benefits for NRIs are similar to those for residents.

To purchase term insurance, individuals may need to undergo medical tests, although this is not always a mandatory requirement. Lifestyle behaviours such as smoking, stress levels, and sleeping patterns can also impact the insurance premium, with smokers and individuals with stressful lives typically paying higher premiums.

Frequently asked questions