A term life insurance policy is the cheapest form of life cover.
The main objective of an individual going in for an insurance cover should be the financial security of his dependents, in the event of his death. This is supplemented by tax benefits and investment-related advantages. A term life insurance policy is a pure life cover. There are no investment benefits attached to it. This is the cheapest form of life insurance cover.
Low premium, flexible premium payments
A term life insurance policy covers a person against death for a limited period or term. For example, a term might be five, 10 or 20 years. The premium for such a policy can be paid throughout the term, annually, half yearly or quarterly. In case of death of the insured person during the term, the nominee gets the sum assured. This policy is attractive because of the low premium on it. However, in case the policyholder survives the tenure of the policy, there is no payout from the insurance company. The policy is closed with no returns from the insurance company to the insured.
Risk management tool
Term policies can also be used as a finance planning and risk management tool. For example, if you take a housing loan for a long tenure, say 10-20 years, you can simultaneously take a term policy of corresponding value. The premium payable will be linked to the outstanding principal over a period of time and as such will decrease over the period as both the tenure as well as the insured amount decreases. In case of death of the primary earning member who is repaying the loan, the family does not lose the home as the insurance company will repay the outstanding loan amount.
Variants
Some insurance companies offer variants of the pure term life insurance policy. These differ from the basic version in the sense that they offer the benefit of return of the premium at the end of the policy term. Therefore, the cost of these variants is obviously higher than of the pure term policy.
Invest according to need
Term insurance policies provide maximum cover at the lowest premium. As the investment portion is divested, the insured is not required to pay a heavy premium. In case you want to discontinue the policy, there is little to lose except the insurance cover. This way you can separate the insurance and investment objectives. You are at liberty to invest your money as per your insurance needs. It is also an inexpensive way of taking a short-term cover till your wealth and asset accumulation are to your satisfaction.
Term policies provide death benefit only for a specific period of time. If the policy expires, the cover also expires. As age increases, the premiums also increase. You must match the term with your needs. It should be ensured the dependents are covered until they can provide for themselves or the loan on a mortgage is repaid. It is advisable to start at a young age, because the premium is low in such cases.
Add-on benefits
There are a number of insurance companies in the market and you have a wide array of choices. The pure term insurance plans are sweetened by some add-ons at an extra cost. You need to compare these as well before opting for one. The variants may include return of premium after the expiry of the term, cover for loss of income in case of loss of employment, cover of medical expenses for a specified period for some specific ailments etc.
As the insurance and investment objectives are separated, with a judicious mix you can maximise returns and reduce risk.
