How Does Term Insurance Work?

Hriday in his early 30’s is a successful manager with a well paying corporate job. While things are going well for Hriday and his family, being the only earning member with an obligation of an ongoing home loan, he was concerned about the financial future. What would happen should anything happen to him be it a sudden red slip or something more unfortunate?

Always being the one who likes to be prepared for all eventualities, Hriday was advised to look at term insurance to safeguard the future of his family and dependents.

So can term insurance be that financial tool that can help Hriday put his worries to rest? Let’s dig in.

Understanding how term insurance plans work

Term insurance policies promise to pay the nominee a fixed sum assured in the event of the death of the policyholder.

To make term insurance work for him, the onus is on Hriday to choose an optimum insurance cover that can cover the financial needs of his family. The premium for the term insurance plan has a direct correlation with the sum assured amount. So higher the sum assured, higher is the premium and vice versa.

Instead of downsizing the premium for a temporary relief in monthly outgo, a sum assured of 10 times the annual income is warranted as a bare minimum.

Term Insurance Premium

The biggest benefit of term insurance plans are low premium costs. The final premium amount is calculated by taking into account the age of the policyholder, the tenure of the term insurance plan, the overall health of the policyholder and the desired sum assured. While many employers also offer insurance cover to their employees, having an independent policy is warranted to ensure maximum protection including coverage during job loss or change of job timelines.

Term Insurance and Maturity Benefits

Being a protection only plan, term insurance policies do not offer any maturity benefits on survival of the policy term. So Hriday would not be entitled to any benefits on survival. Some policies are however starting to offer a small percentage of premiums paid as benefits but such plans are very limited.

Beneficiary Free to Use Sum Assured as per their Needs

In the unfortunate event of demise of the policyholder, the sum assured is paid to the nominee. The nominee or beneficiary is free to use the received sum assured amount as per his or her financial needs and wishes with no pre condition. In this case, Hriday’s beneficiary can choose the money to repay the home loan, use the funds for children’s education or use it for any other domestic need.

Term Insurance- Why Sooner is Better

Term insurance plans work best when taken for the maximum possible duration. Usually insurers offer term plans till the age of 60 years. At 30, Hriday can therefore opt for a term insurance plan with a 30 year tenure period. Opting for a smaller tenure makes Hriday more vulnerable in the sunset years with no cover or a very high premium outgo should he choose to seek an alternate term plan later in life.

Protection Versus Cash Value

Term insurance is a purely protective instrument and should not be seen from the prism of wealth creation or cash value. Offering a security cover to the family members and dependents is what makes term insurance plans popular and pocket friendly with lower premiums.

Opting for a term insurance plan is indeed a great idea that can offset Hriday’s financial worries should anything unfortunate happen in the future. Being a sole breadwinner with an ongoing home loan EMI, term plan would take care of all financial aspects while securing the life of his family and children.

Undoubtedly, Term Insurance is one of the most economical “safety net” for the dreams that you have for your loved one’s.