Living in such an unpredictable world, we are always vulnerable to things we never thought would happen to us. But they do, and unfortunately, they sabotage our plans for the future. If you have a financial plan ready for the future, where you provide your children with the best education possible and build the retirement fund of your dreams, an unfortunate event such as death can affect that plan for the worse.
This is where a term policy comes in. If you have heard of a term policy before but never knew what it does and why people consider it an essential purchase, this guide is for you.
What is a Term Policy?
A term policy, also known as term insurance, is a basic life insurance policy that pays a pre-determined amount of money to the family or nominee of the insured deceased. This sum can help the nominee manage their living expenses or pay debts. As the death of the breadwinner can cause significant financial strains on the dependent, a term policy can come to their rescue and help them lead a comfortable life without any financial woes. As it offers just the death benefit, it is one of the most budget-friendly insurance instruments in the market.
How Does a Term Policy Work?
A term policy pays a guaranteed sum, which is pre-decided, to the nominees or the family of the insured if they die unexpectedly during the policy term. A term policy is bought against regular premiums paid by the policyholder. The premium payment frequency can be monthly, quarterly, or yearly, as chosen by the policyholder. The premium depends on term cover, i.e., the guaranteed sum. Apart from that, several other factors, such as age, lifestyle habits, gender, and present and previous medical condition, affect the term policy premium.
What you Should Know About Term Policy
1 No Survival Benefits:
A term policy provides the death benefit. This means it doesn’t offer any monetary benefits like other types of life insurance policies do. No bonuses’ accrued sum is offered if the policyholder survives the policy term. Therefore, if the demise of the policyholder takes place after the policy term is over, the nominees don’t get the promised sum. Therefore, the policy term is an essential element you have to decide when you are buying a term policy. It shouldn’t be too short.
2 You Get Tax Benefits:
To encourage individuals to get a term policy, several tax benefits have been introduced under Section 80C of the Income Tax Act. As per this section, you can claim tax deductions on premiums paid towards term policy and other types of life insurance.
3 Always Look for a High Claim Settlement Ratio:
Life insurance is a necessary purchase, all the reasons why you cannot purchase it without thinking. Not only choosing the right type of term policy is essential, but also the insurer you are buying it from. To ensure that you are choosing the right insurer, look for their claim settlement ratio. A claim settlement ratio is the measure of the number of claims settled against the claims filed by nominees. A higher claim settlement ratio is a positive indicator of the insurer’s claim settlement capabilities. Therefore, when you are buying a term policy, ensure that the insurer has a claim settlement ratio higher than 90%.
4 Not all Deaths are Covered:
This might come as a shocker to some individuals. Only natural deaths are covered under a term policy. Accidental deaths that result due to overdose or intoxication are not covered. In addition, the involvement of the insured in adventure activities that leads to any fatal injury is not covered. Suicides are also not covered in a term policy.
5 A Non-Disclosure is Signed:
Providing the necessary details is essential when you are buying a term policy. Any non-disclosure that may be relevant can result in the rejection of claims. You must make full disclosure of your lifestyle habits, age, and diseases, even if it costs you a high premium.
6 You Can Use a Term Insurance Premium Calculator:
If you do not have a clear idea of the premium amount you will be required to pay, you can use a term insurance premium calculator for the same. A term insurance calculator would give you an estimate of the premium on the basis of your age, lifestyle habits, and medical condition.
The Bottom Line:
When you are creating financial plans for the future, a term policy cannot be neglected. It’s an essential purchase that can offer your family a financial net when you are not around. Don’t worry if you are buying a term policy for the first time. With these tips, you can ensure that you are making the right purchase.
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Nazim Khan (Author) 📞 +91 9536250020
[MBA in Finance]
Nazim Khan is an expert in Microsoft Excel. He teaches people how to use it better. He has been doing this for more than ten years. He is running this website (TechGuruPlus.com) and a YouTube channel called "Business Excel" since 2016. He shares useful tips from his own experiences to help others improve their Excel skills and careers.
