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Should You Buy a Term Insurance Plan for Yourself?
When it comes to financial planning, one of the most debated topics is whether buying term insurance is a good or bad idea. Term insurance is a type of life insurance that provides coverage for a specific period, or "term." If the policyholder passes away during the term, the beneficiaries receive a death benefit. If the policyholder outlives the term, the coverage ends, and no benefit is paid out.
The question of whether term insurance is a good or bad idea depends on various factors, including your financial goals, family situation, and long-term plans.
In this article, we have covered all the pros and cons of term insurance, who should consider it, and how it fits into your overall financial strategy.
Table of Contents
What is Term Insurance?
Before diving into whether term insurance is good or bad, let's understand what it is. Think of term insurance as a safety net for your family. It's a pure life insurance policy that provides financial protection to your loved ones if something unfortunate happens to you during the policy term.
Unlike other insurance types, it is straightforward: you pay premiums and in return, your family gets a guaranteed sum if you pass away during the policy period. Now let's know the good and less favorable side of term insurance.
What are the Advantages of Buying a Term Plan?
Term insurance has several benefits that make it a popular choice for many people:
Affordable Premiums
One of the biggest advantages of term insurance is its cost-effectiveness. Premiums are slightly lower compared to other life insurance plans. Imagine getting coverage of 1 crore for approx 11,000 per annum.
For example: A 30-year-old non-smoking male pays around ₹12,644 - ₹15,100 annually for a ₹1 crore term insurance coverage for 35 years. This affordability means you can secure your family's future without straining your current finances.
High Coverage at Low Cost
Term insurance allows you to buy substantial coverage at remarkably low premiums. This means you can ensure your family maintains their lifestyle, pays off debts, and fulfils long-term goals like children's education, even in your absence.
Flexibility in Coverage Duration
Whether you need coverage for 10, 20, or 30 years, term insurance lets you choose a duration that aligns with your specific needs. For instance, if you have young children, you might want coverage until they complete their education. If you are paying off a mortgage, you can match the term length to your loan tenure.
Tax Benefits
In many countries, term insurance premiums qualify for tax deductions. The death benefit received by your nominee is usually tax-free, making it an even more attractive financial planning tool. However, it's important to consult with a tax advisor about specific benefits in your region.
Peace of Mind
Perhaps the most invaluable benefit is the peace of mind it offers. Knowing that your family won't face financial hardship in your absence can be incredibly reassuring. This emotional security is something that can't be measured in monetary terms.
What are the Disadvantages of Buying a Term Insurance?
While term insurance has many benefits, there are some drawbacks to consider:
No Maturity Benefits
One of the main criticisms of term insurance is that if you survive the policy term, you don't get any returns. This means all the premiums paid over the years yield no financial return if you outlive the policy. However, this is precisely why term insurance premiums are so affordable compared to other life insurance products.
No Investment Component
Unlike endowment policies or whole life insurance policies, term insurance doesn't build any cash value. It's purely a protection tool, not an investment vehicle. Some people find it challenging to pay for something that doesn't offer any living benefits.
Premium Increases with Age
If you decide to buy term insurance later in life or renew an existing policy, the premiums can be significantly higher. This is because insurance companies calculate premiums based on age and health conditions, which typically deteriorate with time.
Medical Examination Requirements
Most term insurance policies require medical examinations before approval, which some people find inconvenient. Additionally, if you have health issues, you might face higher premiums or even rejection.
Is Term Insurance a Good Choice for You?
Term Insurance is Good For You if:
You Support Others: If you have family members or anyone who depends on your income (like children, a spouse, or elderly parents), term insurance can provide them financial security if something happens to you.
You Want Affordable Protection: Term insurance gives you a large amount of coverage at a low cost compared to other types of insurance. This means you can protect your loved ones without breaking the bank.
You Have Long-term Responsibilities: If you have debts like a mortgage or other financial commitments that will take years to pay off, term insurance can help ensure those are taken care of if you are no longer around.
You Only Need Life Coverage: If you are solely looking for insurance that provides a death benefit without any extra savings or investment options, term insurance is a straightforward choice.
You Don’t Expect a Payback: Term insurance usually doesn’t provide any money back when the policy ends, which means you are okay with that and are primarily focused on the protection it offers while you pay premiums.
Term Insurance is Not Ideal for You if:
You are Financially Independent: If you don’t have anyone who relies on your income, term insurance might not be necessary.
You Have Significant Wealth: If you have enough assets to support your family without needing life insurance, you may not need to invest in term insurance.
You Want Investment Returns: If getting money back or having a savings component is important to you, other types of life insurance and investment options might better serve your goals.
You are Approaching Retirement: If you are near retirement age and already have enough savings set aside, term insurance might not be the best fit, especially if your focus is more on maintaining your current assets.
Different Types of Term Insurance Plans in India
Level Term Plans
This is the most straightforward type of term insurance. With level-term plans, the amount of coverage you get remains the same throughout the entire policy duration.
For example, if you have a policy worth ₹50 lakhs for 20 years, your beneficiaries will receive that amount if you pass away within those 20 years. It’s simple and easy to understand, making it a popular choice.
Increasing Term Plans
These plans are designed to provide more coverage over time. The coverage amount increases over the policy's term, often to keep up with inflation or changing financial needs.
For example, if you purchase a plan that increases by 5% annually, your coverage will rise from ₹50 lakhs to approximately ₹1 crore by the end of the policy term if taken over 20 years.
Decreasing Term Plans
In this type of plan, the coverage amount decreases over time. This kind of insurance is usually used to cover debts that reduce as you pay them off, such as a mortgage or a car loan.
For example, if you have a 20-year home loan of ₹40 lakhs, the coverage might start at ₹40 lakhs and reduce to ₹10 lakhs as you pay off the loan.
Return of Premium Plans
This plan is different because it gives back the premiums you paid if you outlive the policy term. However, these plans usually have higher premiums than standard term policies.
For example, if you paid ₹10 lakhs in premiums over the term and you survive, you get that ₹10 lakhs back.
Joint Term Plans
Joint term plans are designed for couples, providing life insurance coverage under a single policy that covers both partners. It's a cost-effective way to get coverage for two people. If one partner passes away, the surviving partner gets a payout. It's a good option for married couples or partners who want to secure each other's financial future.
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Things to Know Before Buying a Term Insurance Policy
1. Select Adequate Coverage
When purchasing a term insurance plan, one of our basic mistakes is not selecting enough coverage amount. The most crucial thing, however, is choosing the appropriate level of coverage. Consider your age, income, career, medical history, the number of dependents you have, and your basic monthly expenditures, then decide on a plan that can account for all the variables mentioned above.2. Choose the Ideal Term Insurance Coverage Period
The next crucial factor is deciding on the terms of the insurance coverage. Choosing a term insurance plan at a young age is generally advised if you require greater policy coverage at a cheap payment instalment. Early policy acquisition gives you the longest possible insurance term, which assists you and your loved ones in creating a considerably secure financial plan.3. Do Not Hold Back Any Information
You should never withhold any crucial information from an insurance provider if you want to reap the maximum benefits from your term insurance plan and ensure that your family members do not encounter any difficulties while claiming the policy amount after your passing.4. Select an Insurance Company that Best Suits Your Needs
Another crucial aspect you should consider before buying a term insurance plan is selecting the right insurance provider. It is crucial to look at factors including the insurance company’s experience, client testimonials, claim settlement percentage, and financial stability.5. If Necessary, Add Relevant Riders
A term insurance plan's optional perk that gives you more coverage is the ability to pick suitable riders. These riders offer extra benefits and advantages such as basic life insurance coverage. The riders listed below can be simply selected based on your needs:
- Rider for Accidental Death Benefit: If the policyholder passes away accidentally, this add-on coverage provides additional cash to the beneficiary or nominee.
- Riders for Critical Illness Plans: If the policyholder is found to have a certain sickness, a critical illness plan rider provides a lump sum to the beneficiaries without any limitations or sublimit.
- Rider for an Income Benefit Plan: The family of the deceased policyholder will get an extra income each year for five to ten years if this rider benefit is selected. This rider and the principal sum assured make it particularly useful.
Frequently Asked Questions
Is term insurance worth it?
What is the main disadvantage of buying a term insurance plan?
Do I receive a refund after purchasing term life insurance?
Is term Insurance a good investment?
Are there any drawbacks to term insurance?
Yes, there are a few drawbacks which include:
- No payout if you survive the policy term unless it is term insurance with return of premium plan
- Premiums increase with age
- It doesn’t build cash value or serve as an investment tool
Is term insurance worth it for someone without dependents?
Is term insurance good or bad?
Is term insurance good or bad for young families?
Is term insurance a good idea for mortgage protection?
Is term insurance good or bad compared to whole life insurance?
Is term insurance good or bad for seniors?
Is term insurance a good idea for single individuals?
Is term insurance good or bad for business owners?
Is term insurance good or bad for estate planning?
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Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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