All you need to know about term insurance

16 Jun, 2021

8 min read

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All You Need to Know About term Insurance - Smart Money
Insurance is one of the oldest forms of investment that exists on the investment landscape and as such you have definitely heard about it.

Your parents possibly talked about it. There was possibly someone in the neighborhood who sold insurance plans. And of course, who can forget the TV ads: a harried wife and a paunchy husband; she worries he will die and whatever will happen to her then? They get an insurance plan and all is well… 

Do you have a clear picture on how term insurance works however? Is it necessary only when you’re at risk of dying? When you’re old and ailing? That’s only a part of the picture. Term insurance can actually be a very useful investment option at any age group. Let’s dispel some myths and get a true picture of how term insurance works. 

What is term insurance?

Term insurance is a type of insurance where you invest for a predetermined term, following which you or your loved ones get a payout of your invested capital – with interest depending on the type of policy selected.

The confusion between term insurance and medical insurance

This is indeed where all the confusion is. A lot of people have the misconception that, like medical insurance, the term insurance amount on ALL policies is lost if they do not die within the policy term. But this is way off the mark. There are two types of term insurance policies – one category deals with life cover. This type of term insurance covers your dependents in case of your death. It is especially useful if you are the sole breadwinner of the family and it makes more sense if you are older. 

The second type of term insurance is such that, should you happen to meet your demise during the policy term, your dependents receive the insurance payout. However, if you outlive the policy term, you get the invested capital to spend as you will. Take a holiday, buy a car, make a down payment on a home, study abroad, have a big fat Indian wedding – your call! 

Of course, the second type of term insurance does make for a great retirement plan because you can always choose for the capital payout to happen in monthly installments versus as a lump sum (some insurance companies even let you choose a combination of the two). A retired person can assure himself or herself of the same lifestyle even after their salary ceases, with a well-timed term insurance policy. 

How to tell the difference? Read the sales literature very carefully to determine which of the two types of term insurance is being put on the table. 

What are the benefits of term insurance?

  1. Term insurance is a fixed income product and is therefore low risk. If you have a lot of high risk investments, it might make sense to diversify your investment with this lower-risk investment option.
  2. It is a rather economical type of investment. 
  3. One can get incremental/ continued income when they choose a monthly payout of their term insurance amount after the maturity of the policy. This is one of the main reasons why this type of investment is extremely popular with investors who are nearing retirement.
  4. Term insurance capital is tax free upon maturity unlike many other types of investment capital which can often be heavily taxed.

Key considerations when opting for term insurance

  1. Term insurance often has a really long lock-in period of 10+ years. Investments like stocks and mutual funds are far more liquid. Even fixed deposits are more liquid than term insurance.
  2. Although term insurance policies most often guarantee the payout amount and in this way, they are low-risk, many investors would not mind a modicum of calculated risk in order to pursue the higher returns that are associated with mutual funds and stocks. 
  3. Term insurance is complicated and the type where you get nothing if you outlive the policy is a real waste for younger investors.

What to look for when choosing a term insurance plan

  1. First and foremost –check what we talked about just now. Is there a payout should you survive the policy term? 
  2. Does the insurance company let you choose the frequency of your premium? Some companies let you choose between lump sum, annual and bi-annual premium payment. 
  3. Do they let you choose/ adjust your premium amount?
  4. Is there flexibility in payout of the sum assured? Some companies let you decide if you would like the sum assured to be increasing or decreasing – of course this only matters if it is relevant to you. 
  5. Does the insurance company let you choose how you would like to receive the capital payout when the policy term concludes?
  6. How many years of the policy term must you invest for? Some new-age policies have you invest for a part of the policy term and then they work on multiplying your capital during the remainder of the policy term. 
  7. Are there multiple components? Today there are more complex term insurance policies that combine market-linked growth with insurance. These products have the potential to offer you the life cover you desire, some fixed income guarantee and a variable component that has the potential to be lucrative.

Weigh your options when opting for a term insurance policy. Consider using term insurance policies (the kind that pay you your capital should you outlive the policy term) to lower your overall risk. You might want to use them to diversify your portfolio or in other words to have them – as a security blanket - alongside riskier investments. Remember that capital invested in insurance is out of bounds for the policy term, so please do ensure that you have sufficient liquid capital to meet your daily needs in the interim. And yes, always go through sales literature and do your research on various companies before investing. Do check the insurance company’s claim settlement ratio before investing – this will give you a good idea of whether they are aggressive settlers or often manage to side-step claims by investors like you. 

Start your investment journey with Angel Broking. You have already taken the first step by doing your research and reading up – good on you. Remember anyone can invest irrespective of age, gender or profession. Get started now!

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