Finance

Term Insurance: Investment or Expense?

What is Term Insurance?

Term insurance is a life insurance policy that provides financial cover to your family for a specified ‘term’ or number of years. In the event of the policyholder’s unfortunate demise, the nominees/beneficiaries receive financial compensation from the insurer.

How do Term Insurance Plans Work?

Now that you know what term insurance is, it is essential to understand how it works. Like any other insurance policy, you have to pay a premium for a term insurance policy too. Insurance providers use the premiums collected from the insured for claim-settlement purposes. Premium amounts vary from person to person, plan to plan and insurer to insurer.

Prime Determinants of Term Insurance Premium

The factors considered for the computation of term insurance premium are listed below. Let us understand each of them in more detail.

  • Age

There is a direct relationship between an applicant’s age and the payable premium amount. The younger you are, the lower the term insurance premium will be, and vice-versa. Other factors that are directly related to premium amount are sum assured, income and policy tenure.

  • Gender

As per the WHO life expectancy data published in 2018, the average life span (in years) of women in India is 70.3 as opposed to 67.4 of men. Research suggests that mortality rates are higher in men than women. Given these facts and statistics, insurers usually charge a lower premium for females.

  • Lifestyle

Poor lifestyle habits such as drinking alcohol, chewing tobacco and smoking are likely to reduce an individual’s life expectancy. Thus, insurers charge higher premiums to individuals with unhealthy lifestyles.

For example, if you are a 35-year-old female with no tobacco-chewing habit, you have to pay a monthly premium of Rs. 1,292 for a 50-year term insurance policy of Rs. 1 crore. Conversely, if you have a tobacco-chewing habit, your monthly premium increases to Rs. 1,853.

  • Profession and income

Some professions including mining, firefighting and the army carry higher mortality risks than others. Hence, if you are in a high-risk job, you will be charged a higher premium than those holding low-risk positions such as software developers, nutritionists and dancers.

Term Insurance Plan Calculators

A term insurance plan calculator computes the approximate life coverage you would require based on various parameters such as annual income, the number of years you plan to work, expected income raise and the proportion of income spent.

Most insurance providers have built-in term insurance plan calculators on their respective websites. Once you enter the requisite details, the term insurance plan calculator will instantly display the estimated coverage you need and the approximate premium cost.

You can use it along with a term insurance premium calculator. It will help assess whether a particular term plan is well within your budgetary limits.

Benefits of Term Insurance Plans

  • Nominal premium rates: One of the prime advantages of term insurance plans is that they provide maximum coverage at affordable premium rates compared to other life insurance products.
  • Add-ons: Many term insurance plans provide additional cover at nominal rates for critical illnesses, accidents, total or partial disabilities, etc. They give a lump sum amount as compensation to manage medical bills or loss of income due to disabilities or critical illnesses.
  • Flexibility: You can choose to receive benefits either as a lump sum or as periodic installments. Similarly, you can choose to pay premiums monthly, semi-annually or annually. As far as policy tenures are concerned, you can buy insurance cover of up to 99 years of age.

What is Term Insurance Return of Premium?

It is a type of term insurance that pays back the sum of premiums you paid as a maturity benefit if you outlive the policy term.

Final Words

Term insurance plans financially secure your family in case of an untoward incident. A family can pay off existing debts and manage everyday expenses in the absence of a breadwinner with term insurance. Moreover, premium payments are nominal and eligible for tax deductions up to 10%, 20%, or 30% of Rs. 1.5 lakh based on your tax slab, under Section 80C of ITA.

The term insurance plan calculator and term insurance premium calculator are indispensable free online tools for estimating required coverage and premium amount beforehand. They are easy to use and aid in personal budgeting.

Although term insurance involves only premium expense, it is equivalent to an investment as it offers financial protection and safeguards the future of your loved ones. If you want to know what is term insurance in more detail, you may refer to a life insurance guide.

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