Is Term Life Insurance Worth It?
With a stable job and loving family comprising his wife and two children, Sudhakar was content with his life. He was known for taking prudent decisions both in personal and professional life. One day, at the office, he overheard his colleagues discussing about term life insurance. He listened to the discussion, and realised that he had not yet purchased a life insurance policy to secure the financial requirements of his family, in the case of any unfortunate eventuality.
The next day, Sudhakar consulted his friend Deven, a financial consultant, who, after explaining the pros and cons of term life insurance, suggested him the best plans.
Now Sudhakar’s life and his family’s future are completely secured with a term life insurance.
Understanding term life insurance:
A term insurance policy is the simplest form of life insurance which protects an individual’s family from any unfortunate eventuality for a specific term. An individual has to pay premium for availing the policy, and in the case of the policyholder’s death, the beneficiaries are paid the death benefit equal to the value of the plan.
Insurance companies consider a wide range of factors, including an individual’s age, gender, existing health conditions and habits like tobacco consumption while deciding the premium amount of the plan. Before finalising the policy, insurance companies can ask for a medical check-up to assess the individual’s existing health conditions. Before purchasing a term policy, one needs to understand the pros and cons of term life insurance. The advantages of a term policy are:
- Simplicity: Term life insurance policies are the easiest to understand. As compared with other financial instruments, one is not required to take into account risk factors and make calculations about percentage of distribution across various asset classes or fund types. One has to simply pay the premium, and get the policy for the specified term.
- Low premium payment: Term life insurance policies can be availed at cheap and inexpensive rates. The rate of premium is 30-40% less as compared to other policies like an endowment policy with profits. For instance, a 30-year-old individual can buy a term insurance policy of Rs 1 crore for 20 years after paying around Rs 7,000 as the premium amount on an annual basis.
- Flexibility: Any individual can opt for flexible policy term ranging from five years to 25 years. The age for availing a term insurance policy is also flexible, ranging from 18 years to up to 65 years.
- Tax benefit: A term insurance plan also offers tax-saving benefits under Section 80C of the Income Tax Act. Premiums up to Rs 1.5 lakh, including for the individual, the spouse, and the children can fall under this category, subject to other investments made by the individual. Death benefit payouts to the nominee are exempt from tax under Section 10D.
- Rider benefits: A term insurance plan offers enhanced cover by providing riders. One can opt for critical illness rider benefit, waiver of premium on disability rider benefit, or accidental death rider benefit. By expanding the scope of coverage, the riders make the term plan better and robust.
To understand the pros and cons of term life insurance, one also needs to know its limitations. Some of them are:
- Not suitable for elderly: A term policy is not viable for individuals of older ages, especially beyond the age of 65. While people at the age of 60 can still purchase a term policy by paying higher premiums, insurance companies don’t provide term policies to people beyond the age of 65 years.
- Not suitable for goal based financial planning: A term policy cannot be used to plan for long-term financial goals like education/marriage of child and building a retirement corpus. This policy cannot be used for wealth creation.
- Other disadvantages: A term life insurance policy cannot provide a hedge against inflation, nor does it have a surrender value. One does not have the option of availing a loan against the policy.
Before zeroing in a term policy, one should always know the pros and cons of term life insurance. But all in all, with term life insurance, safeguarding your family and your financial interests has never been so simple.