Term insurance is the most generic form of life cover available in the market. As the name suggests, it is an insurance policy that provides life cover to the policyholder for the term of the policy. If the policyholder survives the policy term, no maturity benefit is payable to them.
Being the simplest insurance policy, there is a lot of competition to quote a lesser premium. This makes it the cheapest policy available in the market. Hence, you should check that there are no hidden costs or terms and conditions before purchasing a life cover. This article talks about the factors that you should consider before purchasing a term plan.
What is term insurance?
Before moving forward, you need to understand what is term insurance. It is an insurance policy for a fixed term wherein the policyholder has to pay a fixed premium monthly, quarterly, half-yearly or yearly until the maturity of the policy.
If the policyholder dies within the policy term, their family can claim the sum assured from the life insurance company. The purpose of this policy is to ensure that if the sole earner of the family dies, the remaining people do not suffer due to a lack of funds. Typically, you will find the following terms linked to term insurance:
- Policyholder: The term insurance policy is issued in the name of a policyholder.
- Beneficiary/nominee: The person who receives the sum assured upon eligibility.
- Sum assured: The policy amount that is guaranteed by the insurer.
- Insurer: The insurance company that issues the policy.
- Term insurance premium: The premium payable for renewal of the policy every month, quarter, half-year or year. Under section 80C of the Income Tax Act, this amount is allowed as a deduction from the taxable income, up to INR 1.50 lakhs. Note: From F.Y. 2020-21, this deduction is available only under the old tax regime. If you opt for paying taxes as per the new tax regime, you cannot claim any deductions.
- Policy term: The tenure for which the insurance policy is valid.
Factors to consider while comparing different term insurance policies in India
- Sum assured/Policy value
The amount guaranteed by the insurer in case of the demise of the policyholder within the policy term. The policyholder can nominate a family member who will receive the money. Alternatively, the legal heir of the policyholder can claim the sum assured.
The most popular sum assured available is for Rs. 1 crore. Although, you can choose a higher amount if you afford to pay higher premiums.
- Term insurance premium:
Premium is the most important factor as the term insurance policy is usually for long term up to 35 years. Hence, you need to keep your premium payments regular for such a long period. You should identify the amount that you can afford to pay regularly. You should compare the premium charged by various insurers and select the best premium for your term insurance policy.
- Period of the policy:
The tenure of the policy depends on your age, lifestyle and other factors. You should choose the ideal policy term that can fulfil your requirement to safeguard your family’s future.
- Terms and conditions:
It is important to go through the terms and conditions of each policy before you buy one for yourself. Insurance companies tend to quote reduced premiums to compete in the market. Against this, they modify the terms and conditions for claim settlement.
Such a practice can cause huge losses to you, induced by the misrepresentation of facts. It is thus important to check and compare the terms and conditions offered by different insurers.
- Claim settlement ratio:
Claim settlement ratio refers to the number of claims awarded per 100 claims made. An insurer who has a higher percentage of the claim settlement ratio is more likely to accept your claim as compared to others. Usually, a claim settlement ratio above 95% is considered good.
Just like you check the quality of any product you purchase, you should check all the parameters of term insurance before buying the best plan for you. It would not only help you reduce losses, but also ensure that the future of your family is secured. Use a term insurance plan calculator to know the premium you could be charged depending on your details and requirements.
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