Photo: iStock
Photo: iStock

Term insurance: its suitability and costs

Here are some pointers to keep in mind while buying a term plan

A term insurance policy is your best bet to financially protect your family against your untimely death. It’s simple and the most affordable life insurance to buy, because it only charges you for insurance and does not charge anything extra for investments. This is why the experience of buying a term plan is very different when compared to a bundled insurance-cum-investment plan. Here are some pointers to keep in mind while buying a term plan.

Do you need it? Just because it’s cheap, and of course the premium qualifies for a deduction under section 80C of the income tax Act, it doesn’t mean everyone needs to buy it. If you are single with no dependants, you don’t need life insurance. The same logic applies to those who are retired and not earning an income.

Are you fit for it: Insurance is about covering risks and the process by which the insurer determines risk, in order to price the policy, is called underwriting. Gauging your health is a very important part of underwriting and often in the case of term insurance cover, you would need to undergo a medical test. The younger and healthier you are, the easier it is for you to buy term insurance. Even your income, education qualification and job profile play a role in underwriting. While these factors may not directly impact your suitability to buy term insurance, they are important to decide the amount of life insurance cover you can get.

Lump sum or staggered payout: Traditionally, a term policy pays a lump sum to the beneficiary on death of the policyholder during the policy term. However, of late there have been plans that break this assured lump sum into periodic payments to generate regular cash flows for the beneficiary for a fixed number of years. A periodic income is easier to handle, especially if the nominee is not able to optimally utilise the lump sum. There are plans in the market that break the sum assured into a lump sum benefit, to cater to the immediate financial crunch and subsequently into periodic income for a fixed number of years.

Regular premium or single premium: A single premium policy takes all the payment upfront, whereas a regular premium policy takes a premium from you every year. In other words, when you buy a single-premium policy you pay upfront for a term that you may not need; if the death occurs in the 5th year, premiums for 20 years would have been paid already in a policy with a term of 20 years. This is not the case in regular premium plans. Since a single premium plan takes the entire payment upfront, the total cost may appear cheaper compared to a regular plan but keep in mind the time value of money. Over time, as you factor in inflation, the annual premium option would actually appear to be cheaper.

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