A term insurance policy is a life insurance product that provides financial coverage to the policy owner for a certain period of time. If the policy owner dies during that policy term, the company pays the death benefit to the beneficiary. The sole purpose of term insurance is to give life cover to the policy owner so that the financial security of his loved ones gets covered for their future.
There are two types of life insurance you can get.
Choosing a pure life cover, which is also called term insurance,
Choosing life insurance with a savings component built-in, also known as endowment insurance
Which is better?
Long-term insurance can always be called a better plan between the two. And the reason is that a term plan gives you pure life cover. This means that there is no savings or profit component. These are basic plans that provide life insurance in a more affordable way than other options. It enables the policyholder to choose a larger life cover at a lower premium in comparison to a similar endowment plan.
It also provides some other features, which makes it a better option.
1. A larger life cover
Because term life insurance plans are a more affordable option, it becomes possible for a person to choose a higher life insurance plan for the same premium as an endowment plan. For example, a 30-year-old can get a term plan with a cover of Rs 1 crore for a 30-year term by paying a premium.
The Rs 1 crore endowment plan will most likely be out of bounds for most 30-year-olds. However, buying a term plan for a similar cover is relatively feasible.
2. Riders
A policy owner is able to attach riders to his term insurance plan, which increases the utility of the policy. So after choosing a critical illness rider or a critical illness plan, for instance, he is able to get the money assured on being treated with the critical illness. This is in addition to the death benefit of an equal amount on death over the term of the policy. There are also different riders to opt for, like loss of employment cover, disability cover, and waiver of premium cover, among others. The policyholder should choose riders depending on his specific needs to make the life cover more suitable and meaningful.
3. Enhanced covers
Some insurance companies also provide the flexibility to increase the life cover at critical stages of the policyholder’s life. For example, the policyholder may be permitted to enhance life cover by 50% at the point of marriage and by 25% at the point of becoming a parent. This makes it easy for him to start with a modest cover and then increase it as his responsibilities increase, as well as his ability to give a higher premium.
4. Tax benefits
Getting term insurance can also provide you with tax benefits. As per Section 10 (10D) of the Income Tax Act*, the sum assured that a policyholder gets after the maturity of the insurance plan is tax-free, and this also applies when the person insured surrenders their policy or loses their life. Furthermore, the bonuses that are paid with this amount are also free from tax under Section 10 (10D).