Article

Term Insurance Explained
January 30 , 2013

Term life insurance is a class of insurance plans that offers protection of income of the individual being insured. Every life insurance company has it but it is the least sold of all policies. Term insurance gives cover for a specified term chosen by you. If you survive the term nothing happens. You do not receive any money back. Are you wondering why would anyone want to buy a term cover then? Much unlearning needs to be done about what the agents have taught us about life insurance.

What is term insurance?

Term insurance is the only kind of life insurance policies in true sense of the word. Pure life insurance is meant to protect beneficiaries against the risk of losing source of income due to premature loss of life. You pay small, affordable amounts as premiums every year and in return the company guarantees that your dependants get a lump sum amount- enough to last them a couple of years in case of your untimely passing away. The insurance company can afford to pay such a huge amount in return for the small premiums collected from you because term insurance works on the principle of risk sharing.

How life insurance premiums are calculated

Actuaries in the insurance companies calculate risk of deaths in a given population size and in a given location using statistical methods. They fix premiums accordingly. As your age increases your risk increases and so does term insurance premiums. Smoking cigarettes increases your risk considerably and premiums for a smoker is higher. Being a woman reduces your premiums a little too.

Who needs term insurance?

Every working person with dependants should have a term cover. If you are retired you do not need life insurance. What you need is a pension plan. If your spouse doesn't work he/she does not need life insurance. Your children do not need life insurance. What they do need is a source of income if you weren't around, until they can find means for themselves. This would come through your term cover (provided you are sufficiently covered). For their needs such as education, marriage, etc you can look to other investment products. Insurance should never be one of them.

Choosing a term insurance policy

The point of consideration in term insurance is premium amount. And like discussed above, premiums mainly depend on your age. So term plans offered by the various companies have comparable premiums for any given age. Go by the cheapest plan available. Choose a term that will span your working years. The earlier you buy cheaper the premiums will work out to be.

You can choose sum insured based on the number of years remaining to retire and your annual income after accounting for annual increment. A married person with kids needs a cover with approximately 8-10 times the annual salary as sum assured. If you are married and are without kids you need about 6-8 times your annual salary as cover. For a single person this can be about 4 times. Typically a term plan would give 500 times the sum assured for the annual premium paid. Buying an online term plan will make it even cheaper. You end up getting close to 1000 times the annual premium as sum assured because you have entirely skipped the agents and their commissions.

If you are one of those having a pile of insurance policies and are unsure if you are sufficiently insured, find out the insurance portion (often mentioned as mortality charge in the policy document) of all your ulips and traditional policies. Take a term cover to make up for what is falling short.

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