Today, I am going to tell you about the most important type of Life Insurance scheme, the Term Plan. Why am I saying it most important? Because, If you don’t take a term plan you are not taking full benefit of the Insurance. In fact, you should not think of any other insurance plan before this plan.
Concept of Term Plan
A term life insurance plan gives a fixed amount to the family in case the policyholder dies. Note, the family would get money only if the policyholder dies during the policy term.
So, if the policyholder lives his life, No one would get money. That is the bitter truth. The money is linked to the death. But this bitter truth is necessary for the well being of your family.
You would agree that death is not predictable. It can come to anyone, anywhere. So, if it is the sudden death of the breadwinner, the family would have the double loss. The emotional loss and the financial loss.
The emotional loss can’t be compensated but the term insurance can compensate the financial loss. This is the concept of Insurance. It compensates the unpredictable financial loss. Be it a car insurance, home insurance or life insurance. The primary objective of insurance is to compensate the financial loss.
In case of a home or car insurance, you get the money equal to your loss. There is no fixed amount of compensation. But in the case of Life insurance, the family would get a fixed amount. This fixed amount is called as the sum assured.
One thing I would like to say, don’t avoid talking about the death. It is scary but the universal truth. Hence, we should be prepared for that. And the first step of this preparation is the term insurance. It gives you the peace of mind.
Also Read: What is Endowment Insurance Plan
Features of Term Plan
I believe, now you must have an idea of the term plan. To understand it better let us learn the features of term plan
The term plan is a pure protection plan. It means the money is paid only in case of loss i. e. death. It charges premium only for the protection. The family will always get the full promised amount whatever would be the reason for the death. Even suicide is also covered after one year.
No Maturity Benefit
Often life insurance is presented as the investment scheme. Thus, the expectation of some return is natural. But, the term plan does not give any maturity benefit or money back. You should treat is just like the car or home insurance. In fact, pure insurance would never give you any maturity benefit.
Since you do not get any maturity benefit, a term plan is very cheap. Some term plan promises to give 1 Crore rupees only for 10,000/year payment. This plan would never pinch you and you can easily afford it.
Large Life Cover
Since this plan is very cheap you can get a promise (sum assured) of a higher amount. The large amount is necessary as your family have to manage on that amount unless there is another source of income. So the sum assured should be enough to replace your future income. You should choose a sum assured which is at least 10 times of your annual income.
No Surrender Value
When you cancel your life insurance scheme, the company gives you back some amount. It is called as the surrender value. However, a term plan does not give you any surrender value.
Since this plan does not take any amount for saving component. It does not have an amount left to give you back. All of your payment is used to give insurance cover.
Like any other insurance scheme, the Term Plan also gives you the tax benefit. The premium paid to this plan is eligible for tax deduction under section 80C of the income tax act. This deduction is available every year as you pay the premium.
Who Should Take A Term Plan
You should take a term insurance plan in case you fulfil following conditions.
- If you are earning
- You have dependents
Sometimes people don’t earn money but their work adds value to the family. Such as a housewife does not earn money but she must be doing many deeds which have financial value. In the absence of her, those chores might cost to the family. Hence, we should also take a term plan for the housewife. The sum assured should be decided by calculating the value of her work.
When I say dependents are necessary for buying term plan I don’t mean that you should have wife and children. You should buy term plan if you are supporting your parents, brothers or sisters.
You must take this plan if you have taken any loan. It would take care of your loan EMI.
However, in some situations, you don’t need a term plan.
- If you have enough assets which can be used for the regular expense of family. Suppose you have 2-3 flats in the city then your family can sell those flats in your absence to meet the expenses. But you should never count your current home or ancestral property as people rarely sell these assets.
- If you are getting passive income, which would continue even after you. The examples of such income are rent from flats and dividend from shares. In this case, you don’t need to worry about the family.
- If your spouse is also earning enough. In this case, the spouse would easily manage the expense of the home.
Types of Term Plan
There are many variations of term plan. The insurance companies are also trying some innovative product hence you can expect some more types of plans in future.
Level Term Plan
This the most common type of term plan. In this scheme, the sum assured remains same throughout its tenure. The Premium also does not change.
Increasing Term Plan
The Insurance companies devised this type of plan to factor in the rising inflation. As you know that rising inflation increases our cost of living. Hence, The sum assured which seems sufficient in today’s prices may be insufficient in the future.
The increasing term plan addresses this situation. In this plan, the sum assured amount increases every year by a fixed percentage. In most cases, this increment would be 5%.
Decreasing Term Plan
The requirement of term plan may come down in near future. It happens when you make assets through the time. Or liability on you may come down with the passage of time. Hence, A high sum assured may not be necessary for the future.
The decreasing term plan addresses this situation as the sum assured decline at a steady rate. This decline goes up to a threshold limit.
Term Plan with Return of Premium
If you still want some maturity amount from the term plan. This type of scheme may be useful to you. In this scheme, if you live until the end of the policy the insurance company returns all of your premium after deducting the GST. However, this plan is again a mix of investment and insurance. That is why it is costlier than the level term plan.
Online Term Plans
This is the new type of term plan which has become very popular recently. Almost every insurance company has launched Online term plan in recent past. As its name suggests These plans are sold online. You can’t get this plan by an insurance agent. Following are the benefits of online term plans.
- It is cheaper as there is no agent between you and insurance company.
- It is faster as you can complete all the formalities online.
- There would not be any mis-selling. You would go for appropriate insurance cover.
To buy an online term plan, you have to visit the portal of the desired insurance company. At the portal, You would find the online term plans. From there, you can easily buy the online term plan.
Best Term Plans in The Market
Are you considering the buy a term plan? If yes, I would suggest you go for the online term plan. It would be much cheaper. However, you should not rush for the cheapest term plan. The companies which give very cheap term plan may not have a good reputation. Rather, you should opt for the company which have good claim settlement record. The financial condition of the company should be also sound.
Following are the top term plans from the big insurance companies.
HDFC Click 2 Protect
ICICI Pru iProtect
SBI Life eShield
Max Life Online Term Plan
To know how I reached this list, you should read my post on best term insurance plan in India.