Most consumers are not aware of what a term plan is. This plays into the hands of unscrupulous telemarketing or agents who end up selling a more expensive & less useful traditional life insurance policy. In this article, we shall look at six term insurance benefits everyone should know of. I’ll also share some useful tips on how you can extract the maximum value from your term insurance plan.
We often make financial decisions around purchasing assets, growing wealth and improving our savings. But a life insurance plan is one of the most important financial decisions you will ever make. Life insurance provides an essential safety net to your dependents as you go about achieving your future goals.
What is Term Insurance?
Term Insurance plans are a type of life insurance that provides death coverage to the policyholder for a specified period of time. If the policyholder or insured were to die during this period, the death benefit shall be paid to the beneficiary or nominee.
Term Insurance plans are pure life covers. Breadwinners opt for these plans to provide financial support to their dependents in the event of their demise. There is no component of savings or maturity benefits or profits in term insurance plans.
Growing Importance of Term Insurance in India
The recognition of life insurance and especially term insurance is growing among the working strata of the Indian society.
This was not the case as back as a decade ago. Then, term insurance plans were not readily distributed nor were there any product focus on developing term insurance plans. This apathy was due to a systemically deep focus on distributor-led products. These products were generally traditional plans and ULIPs where commissions are much higher than a term insurance plan
The term insurance benefits are more known now and the emergence of the Internet played a large part in it.
Online Term Insurance Plans
The term insurance market took off with the use of the Internet as a distribution and awareness tool. Aegon Life Insurance was the first insurance company to widely promote term insurance. This was in 2008 and the trend was soon picked up by other players. The introduction of HDFC Life Insurance, ICICI Prudential Life Insurance, SBI Life Insurance, Bajaj Allianz Life Insurance, TATA AIA Life Insurance and others paved the way for the emergence of term insurance as an essential personal finance product.
Today, term insurance is growing at a very fast pace.
The investor presentation of ICICI Prudential Life Insurance says that. As one of top four life insurance players in India and a very respected brand, ICICI Prudential has been increasing the contribution of term insurance every year from a premium and % contribution basis. To put that in numbers –
Note: APE means Annual Premium Equivalent. The APE normalizes all policy premium into annual premiums. This is done because user pay premiums in different frequencies. Like, cases where the user has already paid all premiums in a single shot. Or the user is paying premiums on a sub-yearly mode like monthly or quarterly, the . The above data is for new business premium.
Similarly, I reviewed HDFC Life Insurance term insurance or protection business. The investor presentations show that there too term insurance has grown by leaps and bounds. Here is how HDFC Life term insurance numbers stack up –
Benefits of Term Insurance
Term Insurance plans have a number of benefits. I have extracted the six most important benefits which every buyer should know. The benefits of term insurance plans are –
- Affordability. Term insurance plans are one of the most affordable forms of life insurance
- High Sum Assured. Term insurance plans offer a much higher coverage when compared to traditional, moneyback, endowment or unit-linked insurance plans (ULIP)
- Simple to Understand. Simplicity is what makes term insurance plans very popular and efficient in its pricing
- Tax Benefits. Term insurance plans offer immense tax benefits under Section 80C, Section 80D and Section 10(10D)
- One Premium for Entire Term. The premiums of term insurance plans are locked for the duration of the plan
- Complements Financial Goals. Term insurance plans perfectly complement your goals for your dependents
Let’s look at each of these term insurance benefits in greater details
Benefit 1 – Term Insurance plans are the most affordable forms of life insurance in India
I read a statistic somewhere that there are more cars in India than the number of active term insurance plans. In other words, people care more about the well-being of their car than the well-being of their dependents.
That being the case, it is only prudent of us to compare the premiums of car insurance with term insurance
Now I have a car and my yearly premiums are about 2% of the present value of the car. My car is priced at ₹10,00,000 which calculates to a premium of ₹20,000 for a car insurance plan.
In comparison, term insurance plans are available at as low as 0.1% of the sum assured.
Here is a table on how much a term insurance plan costs for their HDFC Life Click 2 Protect Plus plans –
The above premiums displayed are annual premiums for a non-smoker male and covers the individual until the age of 65 years as available on the HDFCLife.com website.
It is important to know that the premium changes from insurance company to company. However it is quite undeniable that the term insurance plan premiums are 15 to 20 times cheaper than my car insurance premiums.
And yet some people, who have no qualms about paying car insurance premiums, say that term insurance premiums are expensive. Even the Economic Times featured an article on the same with the title Car Insurance versus Term Insurance
A useful tip. Most insurance companies through their website or when bought on online platforms like ETMONEY and Policybazaar, offer an extra discount to consumers on the term insurance premiums as compared to offline channels like banks or agents. In the case of ICICI Prudential, this discount is 5%. And in the case of HDFC Life Insurance, the discount offered is 5.5%. Do make sure you take advantage of this and further lower your term insurance premiums.
Benefit 2 – Term Insurance plans offer a high sum assured as compared to traditional or ULIP plans
Sum Assured means the life insurance cover that the insurer promises to pay to the beneficiaries under the policy. This sum assured gets paid in the event of your demise within the policy period.
Term insurance plans offer much higher sum assured as compared to other life insurance plans. These other plans are generally traditional, moneyback, endowment or unit/market linked plans. In these plans, the sum assured offered is generally 7 to 10 times of the premium you pay.
As illustrated in the table below, the difference between a pure term cover and a traditional policy are –
- All premiums in a term insurance plan go towards providing a high sum assured to the policyholder. On the other hand, only a small part of the premium go towards providing a life cover to the policyholder in a traditional life insurance plan
- No part of the premium in a term insurance plan goes towards investments. However in traditional plans, a large part of the premium is directed towards building a corpus for the policyholder.
Let’s assume that you pay an yearly premium of ₹20,000. In a traditional plan, you can expect to receive ₹2,00,000 of sum assured against this premium.
Unfortunately, ₹2,00,000 of life insurance coverage is very low and might cover only 5 to 7 months of your family’s expenses.
The purpose of a term insurance plan is to offer you a high sum assured. This is done so that you can leave your family & dependents with enough money so that they don’t go through financial hardships in your absence.
Let’s put some numbers behind it.
From available data, we see that the average sum assured of a term insurance policy is a little over ₹1,00,00,000 (₹1 crore). This comes to at an average premium of ₹17,000.
Now the same ₹17,000 will offer only ₹1,70,000 of life cover in traditional plans. This means the ₹1,00,00,000 sum assured is about 60 times of the sum assured I would have received in a regular traditional, moneyback, endowment or ULIP plan
Net net, term insurance plans offers high life insurance cover at low premiums
Benefit 3 – Term Insurance plans are super simple to understand
If I were to ask a zen master to explain a term insurance plan, here’s what he’d say –
The insurance company (payor)
upon the demise of the policyholder (event)
within the specified time period (term)
promises to pay a specific sum of money (sum assured)
to the beneficiary under the policy (nominee)
That’s it. This is term insurance.
Simplicity is one of the reasons for the growing popularity of term insurance plans. Term insurance plans are pure life covers that focus on offering your dependents the contracted sum assured in case you die. You simply need to ensure that you have been paying the premium promptly.
Remember, the core objective of term insurance plans i.e. compensate the dependent upon death of the policyholder. This remains true with all insurance companies and hence comparing the term insurance offerings of multiple insurance companies on a platform is very easy.
Benefit 4 – Term Insurance plans offer immense tax benefits
There are three types of benefits that term insurance plans offer under the Income Tax Act
1. Benefits under Section 80C allows an exemption for life insurance premiums of upto ₹1,50,000 per annum. This includes premiums you might have paid for your spouse and/or children.
2. Benefits under Section 10 (10D) which pertain to the benefits that are payable under the policy. These benefits can be the maturity amount or death benefit. Under the provisions of this section, all benefits payable are fully exempt from taxes
3. Benefits under Section 80D allows an exemption to that part of the premium that is paid for health related coverages. This is mostly with the critical illness riders which can be added with a term insurance plan. The provisions of this section allow for premiums upto ₹25,000 to be exempted from taxes
Remember, tax laws change often so it is wise to be on top of this and consult your tax advisor for greater details
Benefit 5 – Premiums of term insurance plans are locked for the duration of the plan
It is surprising how many consumers don’t know this. When you purchase a term insurance plan, you are effectively locking the premium that you will be paying this year, the next year and every year until the end of the term plan.
The only variable that might change the premium upwards or downwards are the tax rates. These are currently at 18% for term insurance premiums. Otherwise the base premium remains constant through the life of the policy
And this is where it becomes highly beneficial and smart of you to start your term insurance plan as soon as possible when the premiums are lower for younger ages.
Now I did some math on this.
If I were to take a 1 crore term plan at the age of 30 years, my premium comes to approximately ₹10,000. This plan will provides me coverage until I am 75 years of age. This means I will be paying ₹10,000 every year for the next 45 years which totals to ₹4,50,000.
Let’s say I procrastinate and decide to enroll for a term plan much later – say at the age of 45 years. At this age, my annual premium is much higher at about ₹30,000 per year. And I get coverage until I am 75 years of age. This means I will be paying ₹30,000 every year for the next 30 years which totals to ₹9,00,000.
So, figure this –
When I enrolled to the plan at 30 years, I would have been covered for 45 years and my total premium outlay will be ₹4,50,000
And when I enrolled at age 45, I would have been covered for just 30 years but would have paid double the amount of premium in those 30 years at ₹9,00,000 (as compared to ₹4,50,000 if I had taken the plan at the age of 30)
Be smart about term plans and don’t wait any longer to enroll for one.
Benefit 6 – Term insurance plans perfectly complement the goals for your dependents
Let me explain this with two scenarios
You are a mutual fund investor and have been doing a monthly SIP of ₹9,000. This is being done with a goal of building a corpus of ₹50,00,000 in the next 15 years for when your daughter turns 21. You want her to take the GMAT and gain admission into a college in the United States. But over these 15 years, if you were to meet an untimely death, then your dreams for your daughter’s future are in jeopardy.
This is where a term insurance plan steps in. The term plan ensures that even if you aren’t there, your daughter’s dream is still intact.
Which means you compliment your SIP with a term plan which for your age costs you just ₹350 per month.
Related tool: SIP Calculator
To put it another way. You have the option of securing your goal towards your daughter’s education with a monthly commitment of ₹10,350. Of this, ₹10,000 goes towards wealth creation and ₹350 goes towards securing the goal.
Come to this of it, we have created a traditional or ULIP insurance policy by using a combination of mutual fund SIP and term insurance plans.
Term insurance, believe it or not, is a great instrument to leave an inheritance for your dependents.
You can do this by opting for plans which cover you upto the age of 99 or 100 years. Given India’s current life expectancy of 68 years, living a 100 years is an outlier scenario.
Since you are likely to die before that age – you almost ensure that your beneficiary will receive the contracted sum assured.
Let’s talk numbers.
Say, you are 35 years old and want to leave your son with a corpus of ₹5,00,00,000 when you die. You can opt for a term insurance plan covering upto the age of 100. This will cost you a monthly premium of ₹11,000.
Now I assume you live till a ripe age of 85 years – you would have paid about ₹66,00,000 in premiums but your son will be getting ₹5,00,00,000 as the death benefit payout.
Net net, different people view term insurance plans in different scenarios. Some look at it as a way of securing your goals while some are creating an inheritance for their loved ones. In my case – I have it purely on account of peace of mind that my dependent’s financial future is safe even if I am not around.
Term Insurance plans are on the rise and the private insurance companies have been leading the charge. LIC (Life Insurance Corporation of India) too has introduced term plans over the years succumbing to this trend of offering simple, easy-to-understand and relevant insurance products to consumers.
Do ensure you use the benefits listed in this article to your advantage and share this with your friends and family members who can do with this information.
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