Insurance policies form an important part of a financial portfolio. The insurance provider covers uncertainties, thereby reducing your risk liability largely. Out of the numerous insurance policies available in the market, a term plan offers a high level of coverage at a nominal cost.
What is term insurance?
The concept of term insurance can be understood with the help of an example. Ms. Geeta Saxena, a 32-year old working professional, is the sole breadwinner of the family. She supports her aging parents and bears all the financial responsibilities of her home. Upon receiving advice from her financial advisor, she purchased a term policy of 20 years by paying a premium of INR 10,000 per year. The amount that she is covered for is INR 10 lakh. Ms. Saxena knows that in an event of her premature death, her parents are entitled to receive the pre-determined amount. Therefore, she has peace of mind knowing that her parents will be able to meet their financial obligations even when she is no longer around.
Term insurance, a type of life insurance policy, is designed exclusively to cover the risk of an unfortunate event of death. It is a pure risk cover, which provides a sum assured amount to your beneficiary in case of an unfortunate incident. Your loved ones may use the amount in whatever way they seem fit such as, to meet lifestyle needs, pay off a loan, or to fund your children’s future education.
Terms involved in term plans
Before investing in a term policy, it is imperative to understand various jargons to make a well-informed purchase decision. Following are four common term insurance terms you need to know.
- Death benefit
Death benefit, also known as the payout, is the amount that the nominee receives in case the policyholder has a sudden death. Insurance providers allow you to choose the type of payout you would like your family to receive based on the family’s needs. You may opt for a lump sum payout, lump sum plus fixed yearly payouts for a specified period, or lump sum plus increasing yearly payouts.
- Policy term
This refers to the period until which you are entitled to enjoy the benefit of the term plan. In an event of death during the policy term, the nominee is entitled to the payout benefit. The policy benefits stop at the end of the policy term.
Add-ons are an additional benefit offered with your base policy at an additional nominal price. One of the most common add-ons with a term insurance policy is a critical illness rider. You may seek coverage against various dread diseases such as loss of limbs, third-degree burns, cancer, and heart attack, among others.
Exclusions refer to those events whose occurrence does not provide you with policy benefits. Following are certain exclusions associated with term plans.
- Accidental death benefit exclusions
Some of the common exclusions associated with accidental death benefit include death due to intentional self-inflicted injury, war, invasion, engagement in hazardous sports or hobbies, biological contamination, revolution, and criminal offense, among others.
- Total and permanent disability exclusions
The disability benefit is not payable in case of an attempted suicide, under the influence of harmful substances, pre-existing conditions or sicknesses, besides others.
It is important to do your due diligence and conduct an in-depth research on the terms and conditions of a term policy before investing in one. Though you may find the process tedious, doing so ensures that you are well aware of the cover that you have invested in.
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