Buying an insurance policy is essential for financial planning and to protect your family from future uncertainties. A term insurance plan is a policy designed to protect your loved ones in the event of your untimely death. As the name suggests a term plan is active only for a specified tenure, providing a life cover for your family during that time.
This article will discuss term insurance and how it works for better understanding.
What is Term Insurance?
Term insurance is a kind of life insurance policy that provides coverage for a limited or a specific number of years (or “term”). If the insured dies during the specified period while the policy is active, or “in force,” a death benefit will be paid to the beneficiaries.
This death benefit is paid out to the beneficiaries or the family of the policyholder so that they can financially sustain themselves in the insured’s absence. Once you buy a term plan, it is necessary to pay all the policy premiums so that in case of an unfortunate event, the entire death benefit can be paid out to your nominee/nominees.
In pure term plans, you cannot avail of any benefits if you survive the policy term. When a pure plan matures, the policy coverage ends and no benefits can be paid out the policyholder or their family.
How Does a Term Insurance Work?
Before you buy a term plan, it is necessary to understand how term insurance works. In a few simple steps, let us see how you can make the most of a term plan:
1. Choosing a policy
Assess your needs and those of your family before purchasing term life insurance. Your coverage should be adequate to cover your dependents’ current and future living expenses. Some factors to consider are children’s college fees, marriage, spouses’ retirement needs, pending liabilities, your family’s needs, and the period you need a term life insurance policy.
An ideal amount of coverage or sum assured should be 10 or 20 times more than your annual salary.
2. Choice of policy term and premium payment method
Select for how long you want to secure your loved ones with a life cover. This will help you determine the policy tenure. The policy term of a term plan is generally between 5 years to 40 years.
Then select a premium payment mode and frequency for the policy. You can make a one-time premium payment by opting for a Single Pay plan. Alternatively, you can pay the premiums throughout the policy term or for a limited number of years only.
3. Premium calculation
After assessing your needs, policy type, and mode of premium payment, you can take help from a term insurance calculator to determine the premium amount of different policies and compare different plans based on different factors.
You will get the best estimate of the premiums you have to pay. Knowing the approximate premium amount allows you to browse and choose plans from trustworthy insurance companies like Tata AIA Life Insurance.
4. Optional coverage
Riders allow you to increase your base coverage for a small but additional premium. The rider benefits cover specific events and risks such as critical illnesses, accidental death, accidental disabilty, hospitalisation and more. If any of these covered event occur during the policy term and the rider term, you will receive the payout benefit under the rider.
Purchasing a term insurance policy is essential in preparing for future uncertainties. Thus, Individuals can make an informed decision by understanding how it works, using a term insurance calculator and selecting a reputable insurance company. Furthermore, adding riders and reaping the benefits of low premiums and high coverage amounts can provide individuals and their families with additional security.
5. How many years do you pay for term insurance?
The term insurance payment period varies depending on the premium payment option that the policyholder selects. If you opt for a Limited Pay option, your premium payment term will be lesser than the policy term. On the other hand, a Single Pay plan means you can pay a single lump sum premium at policy inception. By choosing the Regular Pay plan, your premium payment term will be the same as your policy term.