Know the Basics of How Term Insurance Works

What Is Life Insurance and How Does It Work? | Aha Life Insurance Canada

There are many events in one’s life for which one usually plans and prepares as early as possible. It may be their child’s higher education abroad or it could be the marriage of their daughters or sons. Since these events can be demanding, in terms of money, time, and energy, efficient planning is paramount for pulling it off. Unfortunately, no matter how well one prepares, there is no saying when an unpredictable and unfortunate event can take place that affects a family breadwinner or their loved ones. That is why it is important to buy term insurance when planning life’s major events. While the emotional consequences of an untimely event or demise are harrowing, the financial repercussions can be relieved with a well-designed term insurance plan.

What is term insurance?

In simple terms, term insurance is an insurance contract between the policyholder and the insurer. The policyholder pays premiums for a stipulated period of time. If, during the duration of the policy, the policyholder passes away under conditions specified in the policy, the nominees they have chosen receive a hefty financial payout. Term insurance is usually opted for by the primary earning members of their families. The payout helps the financially dependent members cope with the financial difficulties that may come up in the policyholder’s absence.

The main feature that distinguishes term insurance from its counterpart, which is whole life insurance, is that it offers coverage for a limited period only.

Term insurance premiums and payouts 

Now that you have the answer to ‘What is term insurance?’, let’s take a look at the premium and payout aspects of it. The premium for a term insurance policy may differ from insurer to insurer. Major factors affecting the premium you may be quoted include: age, gender, smoking habits, other lifestyle habits pertaining to health, occupation, the sum assured and tenure you have chosen, and so on. The term insurance premium calculator tool is helpful in giving an estimate of the premium based on certain variables you enter.

As term insurance is valid for a certain time period only, the premiums for it are also comparatively cheaper. This is one reason why it is so popular amongst potential policyholders.

One may choose to pay the premium at once in a lump sum amount, or they may pay it in regular installments over a period. When you buy term insurance, you can opt for the ‘return to premium’ feature, wherein you will receive the total premiums paid if you survive the maturity of the policy. This is referred to as the maturity benefit payout. There are mainly three types of payouts in term insurance: surrender value payout, maturity benefit payout, and death benefit payout.

The surrender value payout is the amount you receive when you voluntarily end the insurance contract before the maturity of the policy. The maturity benefit payout is the amount you receive when you outlive the maturity of the plan; the death benefit payout is what the nominees receive when the life insured passes away during the term duration.

Tax benefits on term insurance 

If you are concerned because the term insurance premium calculator estimate is a high amount, then one thing that may offset your concern is the tax benefits you can get on the premium.

According to Section 80C of the Income Tax Act, the premium you pay towards your term insurance plan is eligible for tax deductions of up to Rs 2.5 lakhs, subject to tax laws, terms, and conditions. Similarly, the surrender benefit payout, the maturity benefit amount, and the death benefit payout are also exempted from taxes.

FAQs related to term insurance 

  • Can a person with a pre-existing condition buy term insurance?

Yes, they can. However, it depends on the kind and stage of the condition the person is diagnosed with. The premium may be a bit higher in this scenario.

  • Can term insurance bring in market-related returns?

No, a regular term policy is not usually affiliated with market-linked instruments, and therefore, may not bring in any such returns. There are other plans, such as ULIPs, universal life insurance, and so on which can be preferable for market-related returns.

  • Who and at what age can one buy term insurance?

Individuals in the age bracket of 18 to 65 years are eligible to buy term insurance. The premium may increase as one gets older, so it is advisable to buy term insurance at a young age to incur reduced premiums.

Thank you for reading!