Term life insurance is “pure” insurance. It offers protection only for a specific period of time. If the insured dies within the time period defined in the policy, the insurance company will pay the beneficiaries the face value of the policy.
Financial planners contend that a term plan is the best form of insurance because it gives a very high cover at a low price. The premium of a term plan is a fraction of what we pay for an endowment plan or a Ulip with the same coverage. Unlike other types of life insurance, term insurance does not accumulate cash value. All the premiums paid are used to cover the cost of insurance protection, and one doesn’t receive any refund at the end of the policy period. The policy simply expires.
Before one buys a term plan, here are a few things to consider.
How much cover does one need?
Life insurance is meant to provide the dependents of the policyholder with enough money to replace his income in case he dies. Life insurance must take care of the following things: the basic expenditure that family will incur, major expenses like education & marriage of children and other liabilities like loans.
Till when does one need the cover?
The tenure of the term plan is almost as important as the amount of cover. An insurance policy should cover a person till the age he intends to work. Experts believe a person needs a life cover till at least 65 years, though it may vary according to circumstances.
Choose a term plan that offers the flexibility of fixing the tenure. Many online term plans come with fixed tenures of 15, 20, 25 and 30 years and they don’t offer insurance beyond 60 years. So, a 32-year-old will not be eligible for a 30-year-plan and will have to buy a 25-year cover, which will end when he is 57 years. It is best to avoid such plans and opt for a policy that can be customized to your needs.
Has one factored in inflation?
Suppose one bought Rs 50 lakh cover and thought it to be sufficient, it should be reconsidred. The value of Rs 50 lakh will only be Rs 28 lakh after 10 years assuming an inflation of just 6%. To resolve this problem, some insurance companies offer plans where the cover increases by 5-10% every year or is indexed to inflation.