Term insurance is a popular type of life insurance that provides individuals with comprehensive financial protection for a specific period of time, or term, against a premium amount. Notably, if the policyholder dies during the active policy term, the insurance nominee or beneficiary receives a death benefit. Term insurance is relatively less expensive than the rest of the types of life insurance plans, like whole life insurance. However, individuals must note that term insurance does not offer any cash value or key benefits if the insured outlives their policy term. Additionally, term insurance policy premiums can rise over time, especially with the increasing age of the policyholder.
Let’s discuss the pros and cons of the policy to understand what is term insurance and its scope better.
Pros of Term Insurance
These are the primary pros of the term insurance plan –
Large Sum Assured at Low Premiums
Term insurance is a popular type of life insurance offering a high sum assured at a relatively low premium amount. This is because the term insurance does not extend any investment component, and the premium amounts paid are used to cover the life risk of the insured. Besides knowing the basic information about what is term insurance plan, they must understand that the earlier an individual buys term insurance, the lower will be their premium amount.
This is because insurer perceives young applicants as healthier, and therefore significantly less likely to file a claim compared to older applicants. Individuals can further lower the cost of premiums by comparing term plans online. This approach will help them get the best plan for their needs. They can also use an online term life insurance calculator to estimate policy premiums and then pick the best term insurance plan for 1 crore.
Pure Life Insurance
Term insurance plans can be described as pure life insurance policies. This means that the policy premiums go only towards covering the life of the insured and are not invested in any market-linked schemes. In the event of the death of the insured, the sum assured is paid to the policy’s beneficiary.
Death Benefit
Term life insurance is a lump sum amount paid to the policy nominee in the event of the insured’s sudden death. However, the term life insurance plans may offer the beneficiary a monthly income and a lump sum payment, based on their policy terms. The death benefit serves as a financial net for the insured’s family members, helping them to cover obligations and future liabilities. Receiving the sum assured from the insurer helps family members to maintain their existing living standard without tapping into their savings.
Rider Benefits to Boost Cover
Riders are optional add-ons or extra coverage on insurance plans that can increase their coverage and benefits. They are used to offer additional financial protection to the insured in the event of a critical illness, death, or unforeseen event. Popular riders include – critical illness riders, premium waiver riders, and accidental death benefits.
Tax Benefits
Individuals with term insurance policy plans can avail of applicable tax breaks. To be more specific, the exact death benefit from a term insurance policy is exempted from taxes, but the insurance premiums are taxable. Therefore, having a suitable term insurance plan offers protection and helps save taxes.
Besides knowing the benefits of the policy, individuals must know the drawbacks of the same.
Cons of Getting a Term Insurance Policy
These are the primary cons of the term insurance plans –
No Return on Investment
A term insurance policy is essentially a pure protection plan. This means they offer only live coverage but don’t offer any investment returns. In other words, when an individual pays for a term plan they are only paying for the life cover and do not generate any returns on the money they pay for the cover. Moreover, if the insured outlives the policy term, the cover tends to cease and no benefit is paid to them.
Cost of Premium
The cost of term insurance premiums tends to increase with age. This is because older individuals are more likely to die than younger people. Therefore, individuals who buy term insurance later in their life will have to pay higher premiums.
This can emerge as a barrier for those who want to purchase a large sum assured plan late in life, especially if they are on a budget. However, they can avoid paying high premiums by getting term insurance at a younger age.
No financial aid while the policyholder is alive
Term insurance policyholders cannot withdraw the sum from their insurance policy or borrow against it while they are alive. This means that a term insurance plan is not a smart means to save for one’s retirement or to access funds during an emergency. It will only offer death benefits to the policy nominee after the death of the insured.
Zero room for wealth creation
Since term insurance is a pure protection product that pays policy beneficiaries only when the insured passes away, there is no room to build wealth. Notably, the premiums policyholders pay do not accumulate any returns or earn interest.
Individuals should keep these drawbacks when comparing term insurance plans and pick a policy that matches their requirements. This way they will know which gaps to fill and prepare to account for the lags accordingly.
Therefore, a term insurance plan will not necessarily help the insured build wealth or receive any survival bonus. Individuals should factor in all the pros and cons of the term insurance plans before deciding whether it is suitable for their needs or not. They should also compare the accompanying features of term insurance plans to other insurance plans to make a more informed decision. Besides checking the features of term insurance they should also compare and find details of insurance providers to ensure their claims get settled and they can avail of timely assistance when they need help the most and streamline process quickly.
