What is Term Insurance Plan and How to Choose One?
What is Term Insurance Plan? When you pay a fixed amount of premium for a limited fixed span of time it is called a term insurance plan. It has a relevant term attached to it. Once the fixed period expires, you are not longer entitled for coverage at the previous rate of premiums unless you obtain a new coverage for new premium and term. You can also forgo the coverage. However, in the course of unfortunate death of insured within the period for which the term insurance has been obtained, the beneficiary receives the benefits.
This is the purest form of protection plan and does not have any investment in market attached to it. There is no Maturity or Survival Benefit attached to it. But today there are certain term plans that may shell out elements of saving with them. These are the most economical plans available in the market as there are no Maturity Benefits attached with them and thus there is no question of investment and allocation. In most of the term plans the Insurance Premium is made up of Administrative Expenses, Mortality Charges and remaining is the actual investment being made in the plan.
Administrative expenses are those that are to be paid to the insurance companies for documentations and other formalities. Mortality Charge is one that is paid in lieu of the assurance given by the insurance company of providing benefits to the beneficiary in the event of unfortunate death of the insured. The rest amount serves as Maturity Benefit in case of the demise of the policy holder.
If you are the only bread earner of your family with a number of dependents then term insurance plan could be the best plan which you can opt for as you get high cover for protection of your beloved ones at very reasonable cost.
How to Choose Term Insurance Plans? You simply can not ignore the fact that choosing the right plan for you is a very important part of your financial planning as it not only uses your hard earned money but the security and peace of your loved ones is also at stake. So while you plan to opt for a term insurance plan make sure you keep in mind the following points:
- The needs of one individual vary from the other. It is not necessary that if your best buddy has bought a specific plan then you need to also end up buying that. Your needs would surely be different from your friend. So before you opt for a term plan make sure to analyze if you really need a term insurance.
- Term Insurance plans become a necessity only if you are the sole bread earner of your family with number of dependents and you do not have sufficient assets to suffice if your income ends.
- Make sure that you keep in mind your age. Insurance need not be bought for the sake of it or because in future you may not qualify for getting insured as most insurance companies pitch products by telling you that at an early age you will have to pay low premiums and at an older age your premiums will increase so buy it now. Put it this way, the companies gain while you pay when you are young as your survival chances for a longer duration are far high which means you pay regular premiums for a longer duration of time as compared to older people. Do not get carried away. If you feel you need a term insurance buy it now, if not you may always be able to fetch a coverage for yourself at later age if you are willing to shell money from your pocket.
- Do not confuse term insurance with investment in terms of growth. You do not grow your money nor do you get entitled for any maturity benefits in case the period expires and you are still hail and hearty. It is just an investment to safeguard your dependents in the event of your unfortunate, uncertain and sudden death.
- Prior to opting for a term insurance it is important for you to evaluate your monetary conditions. As you need to pay a fixed premium for a definite time it is important for you to understand if you will be able to continue paying through the period or not. You need to check out all your liabilities and check if you can keep away that amount from your earnings.
- Also try to keep in view the future obligations that you need to fulfill before you plan to buy a term insurance. Your future obligations would help you calculate the amount that could possibly be required by your family when you are not around. So you may plan your term and cover accordingly.
- It is important to closely view the Cost-Benefit Ratio while you opt for your term plan. You need to analyze if the amount paid by you for buying the plan justifies the benefits being offered or not.
- Keeping in mind your health conditions may also help you in a big way while you go choosing for the best term plan for yourself.
- It is important for you to study the different versions of term insurance plans available in the market before you chose one for yourself. Following are few types of term plans that you may study, compare and then choose the best one that fits your needs.
Types of Term Insurance Plans
i) Joint Life term Plan - In this kind of a plan the life of your spouse or your business partner gets covered along with your cover.
ii) Term Plan with Return of Premium – This plan does not provide you with any maturity benefit and is a bit expensive as compared to pure term plans. In this plan the premiums are credited back to the insured on his survival through the policy period.
iii) Level Term Plan – When you opt for a level term plan your life coverage remains unchanged throughout the policy period.
iv) Increasing Cover Term Plan – As the name says, the life coverage shows a steady increase at a fixed rate every year.
v) Decreasing Cover Term Plan – It is vice versa of the Increasing cover term plan. Here the life coverage shows a steady decrease at a fixed rate every year till it reaches its edge.
Term Insurance Plans offer decent coverage at nominal prices. It is, however, important for you to first analyze your requirements in terms of age, money, cover and future needs of your family. You need to completely ensure whether ending up buying a term insurance is worth the call.
Contributed By: Megha Sharma |
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Megha Sharma works as a guest lecturer in Delhi. She holds an MBA & Doctorate from the UPTU. With extensive knowledge and experience in various financial products, she also works as a consultant in banking & finance domains wherein she offers advice to her clients in managing personal finance. | |
- S P PORWAL:kindly advise me regarding the term plan in detail.05-Jan-2013 10:27 PMReply
