What is Term Insurance?

Have you ever pondered about what would happen to your loved ones once you’re gone? Will their lifestyle be adversely impacted? Will your children be settled? Will your spouse be in a financially secured position? These are prudent questions to ask if you are the sole earner in the family. The answer to these very pertinent questions is purchasing a term insurance plan.

This article will discuss the details of term insurance and provide you with an in-depth understanding of the product. Topics covered in this article are:

• What is term insurance and how does it work?
• Benefits of term insurance
• Tax benefits of term insurance
• Types of term insurance
• Example of term insurance

What is term insurance and how does it work?

A term insurance policy provides a life cover that protects your family in the event of your unforeseen demise. The insurance company will provide a lump sum amount to your family after you pass away. In exchange for this benefit, you (the policyholder) will have to pay a regular premium to the insurance company. 

The amount of coverage is proportionate to the amount of premium you pay. The higher the premium, the higher the insurance coverage.

Benefits of term insurance

A term insurance policy comes with the following benefits:

Low Premium: A term insurance policy’s premium component will be much cheaper compared to life insurance or an investment insurance plan. Thus you can get maximum coverage at low premiums.

Disability and Critical Illness Cover: A policyholder can opt for an additional disability and critical illness rider at an additional fee. This clause will provide coverage and protection against any disability and critical illness. This increases the coverage of the term insurance policy.

Accidental Death Cover: The nominee can get an additional payout if the policyholder opts for accidental death coverage by paying an extra fee.

Additional Riders: Riders are additional clauses that a policyholder can add within the policy for an extra fee. Riders include terminal illness rider, a disability rider, guaranteed insurability rider, premium waiver rider, accelerated death benefit rider, child term rider, etc. These riders provide an additional layer of benefit.

Tax benefits of term insurance

Under Section 80C: A person can avail a deduction of up to Rs 1,50,000/year under this section. For instance, if your term insurance premium is Rs. 30,000, you can avail of a deduction of that premium under this section. 

Remember, other investments like ULIP, PPF, EPF, etc can also be availed for deduction under this section (to a cumulative total amount up to Rs 1,50,000/year).

Under Section 80D: A person can avail an additional deduction of up to Rs.25,000 per year if he avails a critical illness rider within his term insurance policy.

Under Section 10 (10D): Total amount payable on the death of a policyholder is exempt from tax as per section 10(10D).

Types of term insurance

Level term insurance: This is where the premium and the sum insured are constant. The sum insured is paid in the event of the policyholder’s demise.

Increasing term insurance: This is where the sum insured is increased every year.

Decreasing term insurance: This is where the sum insured is decreased every year. These kinds of policies are useful in certain situations.

Return of premium term insurance: If a person opts for this type of term insurance policy, the total premium paid is eligible to the returned to the policyholder during policy maturity. These plans are similar to a life insurance policy.

Convertible term insurance: This kind of policy can be converted into a life insurance policy if the policyholder chooses so.

Example of term insurance

Let us assume that Mr. Sashi (aged 55) bought a term insurance policy from HDFC Life worth Rs 50 Lakhs. Policy term was 30 years. Mr. Sashi has been regularly paying his premium for years and has followed all the principles of insurance.

Unfortunately, he passes away from an illness at the ripe old age of 84. As his term insurance did not mature yet, the company will pay Rs 50 Lakhs to Mr. Sashi’s policy nominee.