Term insurance is the purest form of insurance and is widely used by people of all backgrounds.
To understand term insurance you must first recall the way you insure your motor vehicle. The insurance company charges some premium every year and once that year is over and if there is no accident or claim of any nature, the premium paid for the year is finished, and if there is any claim, it is paid to the insured, this is how insurance works.
The premium charged for a period is actually a service charge for providing risk cover for a particular period and once that period is over, the agreement is over and then it needs to be renewed.
For an insurance company insuring a person is similar to insuring a motor car or any other item. There is an expert or a team of experts called actuaries who determine the level of risk involved and then decide how much premium is to be charged for providing the service, that is, risk cover for a period.
This risk cover on the life of person is called 'term insurance' wherein the person who wants to take a risk cover on her/his life pays a specific sum to the insurance company and there signs a contract for a specific period. Once that period is over, the premium paid is finished.
For Indian customers life insurance is an investment and not expenditure (which it actually is), and that is why term insurance is still far from popular in the country, despite the fact that all other insurance products are based on this very product.
An endowment insurance plan where the insured gets back the sum assured plus bonuses for all the policy years is nothing but a combination of term insurance and a regular saving plan.
A ULIP (unit linked insurance plan) is also a combination of term insurance and market investments. Similarly you pick up any life insurance product you will find term insurance at the heart of it because this is what every insurance product is built upon.
Now that it is clear that term insurance is the actual life insurance, we have to understand why one should buy term insurance. A comparison of a term insurance and endowment insurance will explain this better.
Let us assume a young person of age 23, earning Rs one lakh per annum needs insurance of Rs 20 lakh and he has to decide between term insurance and endowment plan.
A term insurance for Rs 10 lakh along with an accidental rider for the same amount will fulfil her/his insurance need and only cost him around Rs 4,500 per year, whereas an endowment plan of same amount will cost him around Rs 50,000 per year which will take away half of her/his salary and hence is not at all a wise or feasible option.
The biggest advantage of term insurance is that it is very cheap to buy and leaves the balance money (Rs 45,000 in the above example) for the investor to plan and invest in so many good options.
It also comes handy when a person is at the start of her/his career and cannot afford high premiums. The only issue is that we will have to accept the hard fact that insurance means expenditure and there are other better options for investments and saving.
Term insurance is also available as an add-on rider with a number of endowment polices and in case the basic endowment policy suits your need, it makes sense to add on a term insurance rider to it at a little extra cost.
Term insurance is also available in a convertible option, where the insured person has the option of taking a term insurance at the beginning of his career to get a low premium and later converting it to an endowment plan where once the income level increases s/he can afford to pay higher premiums.
The maximum age at entry and maturity varies from company to company and maximum age at maturity is 70 for a few companies and 60 or 65 in others. The maximum period for insurance is usually 30 years but can be less in case of some companies.
Every person must take a term insurance if s/he is taking a loan especially a housing loan. The idea is in case the earning member who is responsible for repaying the loan passes away, the insurance amount automatically pays the outstanding loan and the family members left behind are not affected financially.
In order to cover a loan, it is also possible to take 'mortgage insurance' to cover an outstanding loan and is still cheaper than term insurance. Mortgage insurance is a variant of term insurance where the risk cover reduces along with every EMI (equated monthly installment) so that the insurance amount is always equal to the outstanding loan. It is also available as temporary cover of two or three years with one company, which can be used to cover some short-term liability like high amount of loan, which is expected to be repaid soon.
To summarise:
- Term insurance is a plain vanilla life insurance product
- It is suitable for persons from almost any age group and background
- It is the cheapest form of life insurance and is most suited for covering people who have outstanding loans on them
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