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How Does Life Insurance Work? The Process Overview

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How Does Life Insurance Work? The Process Overview

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Term insurance is one of the most affordable forms of life insurance. However, before you purchase a term plan for yourself, you should first get to know the pros and cons of term insurance in India. 

To appreciate the advantages and disadvantages of this kind of life insurance, let’s start by taking a closer look at what term insurance is all about.

What is a term insurance policy? 

Term insurance is a kind of life insurance where an individual, known as the policyholder, purchases a life cover for a specific period of time. This period is known as the policy term. And the life cover is provided by a life insurance company. 

In exchange for this benefit, the policyholder needs to make periodic payments, known as premiums, to the insurance company. 

Simple, right?

Now, in case of the individual’s death during this specified tenure, the beneficiaries listed under the policy will receive a lump sum amount as compensation from the insurance company. This lump sum amount is called the death benefit sum assured.

However, if the policyholder survives the policy term, the term plan simply expires, and no benefit becomes payable (there’s an exception here, and we’ll discuss it later). 

The pros and cons of term insurance in India

A term insurance policy comes with a host of advantages and disadvantages. Getting to know what they are can help you make a more informed purchase decision. Let’s first take a look at the benefits of a term insurance policy. 

The pros of term insurance 

  • It is flexible

In addition to being simple to understand, a term insurance policy is also quite flexible in nature. As a matter of fact, you can customise almost every single aspect of the policy to fit your requirements. 

Right from the sum assured to the tenure of the policy, you can choose exactly what you need. You can even opt for riders, which are add-ons designed to enhance the coverage of the policy. 

  • It is affordable

This is by far one of the most important upsides of a term insurance policy. The premium that insurance companies charge on term plans tends to be lower than the cost of all other different kinds of life insurance products. 

That’s not all. Insurance companies also offer high death benefit sum assured amounts for very low monthly premiums. So, term plans are ultimately extremely cost-effective.

  • It helps you save on taxes 

Yes, you read that right. The premiums that you pay towards a term insurance policy in each financial year can be used to reduce your total taxable income by up to Rs. 1.5 lakhs under section 80C of the Income Tax Act, 1961. 

And a reduction in your total taxable income means that your tax liability is also lower. That’s not all. Under section 10(10D) of the Income Tax Act, 1961, the death benefit sum assured payable to the beneficiaries is also completely exempt from tax. 

The cons of term insurance 

  • It doesn’t offer a maturity benefit

One of the main disadvantages of term insurance is that you pay premiums, but you may not get anything in return. The death benefit sum assured is only paid out on the policyholder’s death. So, if the policyholder survives till the end of the tenure, they wouldn’t be eligible to get any maturity benefits. 

However, you can overcome this downside by opting for term insurance with a return on premium. We’ll take a more in-depth look at what this is in the next section. 

  • It gets more expensive as you age 

As you age, the chances of you developing illnesses or diseases tend to go up. Therefore, the older you are when you purchase a term plan, the more expensive your premiums are likely to be. This is precisely why insurance experts suggest purchasing term insurance when you’re young. 

What is term life insurance with return of premium? 

Now that you’ve taken a good look at some of the most important pros and cons of term insurance in India let’s explore the concept of term insurance with a return of premium. 

As you’ve already seen before, a typical term insurance plan doesn’t offer any maturity benefits. That said, you can circumvent this disadvantage by opting for the return of premium (ROP) rider when you purchase your term insurance plan. 

If you survive the policy term, a term plan with the return of premium rider gives the entire premium paid throughout the tenure of the plan back to you. So, the bottom line is that the ROP rider makes a term plan more lucrative by simply returning the premium paid towards a plan. This way, you end up with a no-profit-no-loss scenario. 

Term life insurance with return of premium: Pros and cons 

The ROP rider also has its own benefits and downsides. Here’s a quick look at a few of the pros and cons of term life insurance with the return of premium rider. 

Pros of term insurance with ROP

With the return of premium rider, the main advantage is that you can get back all of the premiums that you’ve paid towards a term plan at maturity. As the policyholder, you won’t have to remain empty-handed when you reach the end of your term insurance plan’s tenure. 

Cons of term insurance with ROP 

The minor downside (if you can call it that) is you will have to pay an additional premium for the ROP benefit. Since the return of premium (ROP) is an optional add-on, you will have to pay an additional premium over and above the base term plan premium. This can end up increasing your financial obligations, although very nominally. 

Term vs whole life insurance: Pros and cons

If you’re concerned about term insurance providing coverage only for a limited period of time, a whole life insurance plan is an option that you can consider. As the name itself suggests, a whole life insurance plan is designed to provide coverage for your entire life, up to the age of 99 or 100. 

The advantage of whole life insurance over term insurance

While extended coverage is a major advantage that whole life insurance has over term insurance, it isn’t the only upside. Another major benefit that you get by opting for a whole life plan is that you also receive maturity benefits at the end of the plan’s tenure. 

The advantage of term insurance over whole life insurance 

Since a whole life plan comes with extended tenure and maturity benefits, the premium that you’re required to pay also tends to be much higher than that of a term plan. So, if you’re looking for more affordable plans with larger death benefit payouts, it is advisable to opt for a term insurance policy. 

Summing up

A term insurance plan is one of the best life insurance products in India. It is not only very affordable but also provides high death benefit sum assured payouts. So, if you’re looking for a pure life insurance product with maximum death benefit at minimum cost, it is advisable to opt for a term plan. You can also choose this kind of life cover if you want to increase your existing coverage at nominal rates. 

Frequently Asked Question (FAQs)

Do you lose money with term life insurance?

No. You don’t lose money with term life insurance as long as you opt for the ‘return of premium’ rider. The rider ensures that you get back the entire premium that you’ve paid throughout the tenure of the plan at maturity if you survive the policy term.

At what age does term life insurance end?

The age at which term life insurance ends depends on your age at the time of purchasing the plan and the tenure that you opt for. For instance, if you buy a 20-year term plan at age 35, your term insurance cover will end when you attain 55 years of age.

However, as far as the maximum entry age is concerned, most insurance companies don’t offer term plans for individuals above 65 years of age.

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