What is Term Insurance? Definition & Meaning
I have observed in my professional life that the Indian people is generally inclined towards investing in traditional investment-based insurance plans and is lesser interested in term insurance plans. The basic reason behind this is the fact that there is lack of returns in term insurance plans. Being a tax consultant, we usually face questions from our clients about why an individual should get a Term Insurance Plan in India and how to choose a term plan. I am writing this blog to answer the questions relating to Term Insurance plans.
What is Term Insurance?
Term Insurance is basically a life insurance product which provides coverage to the policyholder for a specified term i.e. time period. The policyholder is not entitled to any maturity benefits in case the policy term expires. However, if the policyholder dies during the policy term, the death claim is paid by the insurance company to his/her nominees or survivors.
This is the main reason that the Indian public is lesser interested in getting a term insurance plan as there is no return to the policyholder during the tenure of the term plan or till the death of the policyholder. So, you will ask me why should I waste my hard-earned money on term insurance. Keep reading for the answer.
Why Term Insurance should be taken?
Term Life Insurance provides pure life cover without any saving or return against the premium paid by the policyholder. The basic purpose of term life insurance is to ensure financial security to the family & the dependants after the death of the policyholder. Term Insurance Plans are quite cheaper as compared to the endowment plans in terms of the premium. You can get coverage of Rs. 1 crore at a nominal premium say Rs. 500 per month*.
The only disadvantage of term insurance is that there is no return to the policyholder during his/her lifetime. But you should understand the basic philosophy behind term life insurance for this. Life Insurance products are made to help in emergencies and thus extending a financial support to the family after the death of policyholder is even more important.
Please note that now almost all life insurance companies have introduced term plans which also assures return of premium paid by the policyholders thus you can avoid this disadvantage also but subject to higher premiums.
Who should buy Term Insurance Plans?
In this regard, I would say that term insurance plans are universal. There is no age barrier or occupation barrier for term insurance. You should get term plan whether you are a salaried person or businessman. There is no age barrier also. It is better to start early as you can get higher coverage at lower premium if you take term insurance at early age say in your 20’s.
Who is eligible for term insurance?
According to Indian rules, any person who is 18 or above can get a term insurance policy while the maximum age limit goes up to 65 years. There are certain exceptions as some insurance companies offer plans for even older people too. You need to check eligibility with your insurance provider as it may vary from plan to plan.
Features of Term Insurance Plans
- Income Tax Deduction: As a tax consultant, I find this as the most important feature or advantage of getting term insurance. You can take deduction of the premium paid towards term insurance under section 80C of the Income Tax Act while filing your income tax return. Maximum deduction allowable is up to Rs. 1,50,000.
- Tax exemption on maturity amount:
As per section 10(10D) of the Income Tax Act, the sum assured received by the policyholder after the maturity of the term plan is tax-free. Even if the policyholder dies and the claim is received by the survivors, it will also be tax exempted.
- Larger life coverage as compared to endowment plans:
As already discussed above, term insurance plans are very economical as compared to endowment plans. You need to pay a very small amount to get life coverage of higher amount as compared with endowment plans. It is evident that the object of life insurance is life coverage and not investment returns.
- Riders:
Nowadays, term plans come with many innovative features and riders. You can make your term plan more attractive by opting for critical illness rider or a critical illness plan. For example, if the policyholder opts for a critical illness rider, he shall be entitled to receive the sum assured on being diagnosed with the critical illness. This is in addition to the death benefit against the term insurance policy.
There are many other innovative riders like loss of employment covers, disability cover, waiver of premium etc. for which you need to consult with your insurance advisor or the insurance company.
- Multiple Payout Options
Term insurance plans come with multiple premium payout options. You can choose monthly, quarterly or annual premium payout as per your convenience.
How to decide quantum of term insurance for me?
Choosing sum assured or policy amount for term plan is a matter of person choice and judgement. But as per our opinion, you should avail term plan with sum assured at least 10-15 times of your annual income.
Disclaimer: The author is a Chartered Accountant in Practise and is not engaged in sale, marketing or otherwise dealing in any insurance products. The article is meant for educational purposes only. Investors are requested to take independent decision before buying any insurance product. Taxwink is not responsible for any loss or damage caused to any person from the use of the information contained in this article.
