One of the ways to guarantee1 financial stability and security to your family in today’s uncertain times is to buy a term life insurance plan.
A term policy is a pure life cover, offering one of the most straightforward coverages among life insurance products. However, a new policyholder can have some basic queries regarding the workings of a term plan, what is a sum assured, what is policy term, how to find the correct plan, etc.
In this article, we discuss the meaning of a policy term in a term insurance policy.
Term Insurance: Meaning and Workings
As stated above, term insurance is one of the simplest life cover products. When you buy a term policy, you pay a premium and get life insurance coverage for a specific time or period. In case of your unfortunate demise during this period, your family will be paid a predetermined amount (sum assured).
The term insurance benefits of a regular plan do not have any survival/maturity benefit. If you survive the entire period for which the term policy is active, you won’t receive any payout upon policy maturity. However, life insurance companies have started offering varied types of term policies. You can opt for term insurance with a return of premium2 wherein the sum of all premiums paid is returned as a maturity benefit.
Now that we have seen how insurance works, let us understand what an insurance term or policy term is.
What is Policy Term in Term Insurance?
Policy term is basically the number of years for which your term insurance policy is active. When you buy a term plan, you have to specify the exact number of years you wish to be insured under the plan, i.e., you need to specify the policy term or the insurance term. The beneficiaries will receive the sum assured only if the life assured passes away during the policy term.
Policy Term is one of the primary determinants of your term policy premium. The longer the policy term, the higher will be your total premium outflow.
Thus, a policy term is basically the length of your term insurance policy. But how is it different from a premium payment term? Let us find out.
Policy Term vs Premium Payment Term in a Term Policy
As we saw, the policy term is a straightforward concept. However, it is often confused and incorrectly used interchangeably with another life insurance concept called ‘premium payment term’. Both these concepts refer to certain time periods and are very closely related. However, they are not the same!
The premium payment term is the period for which the life assured has to pay the premium for the policy to remain active. Now you may wonder, since it is necessary to pay premiums to keep the policy active, shouldn’t the premium payment term be equal to the insurance term. Yes and No.
When you buy a term plan, you get to choose the premium payment mode - single, limited and regular. In the regular mode, your premium payment term is the same as the policy term. However, if you opt for a single premium policy, you only pay the premium once, at the start of the policy, and the coverage continues for the policy term. In the case of a limited payment mode, the premium payment term is lower than the policy term.
What is the Ideal Time to Buy a Term Plan?
We are sure you must have heard multiple times, but the best time to buy a term plan is as early in your life as possible, preferably the moment you start earning. This is because the premium for term life insurance is more affordable when you are younger, healthier and relatively disease-free.
Also, life insurance companies offer attractive discounts on premiums for longer insurance terms/tenures. If you buy a term plan early, you can buy it for a longer policy term, thereby enjoying discounts on the total premium outflow.
Apart from the start of your professional career, here are some other ideal times to buy a term plan:
When you get married - to offer optimum financial protection to your spouse.
When you start a family - you can either increase the coverage of your existing plan or buy a new policy if you don’t have one to ensure complete financial protection for your children.
When you get a loan - In case of any eventualities, you won’t want your family to be burdened by the debt repayment. A term policy payout will ensure they can repay the loan.
How to Decide the Ideal Policy Term?
Up to retirement: The ideal time for term policy maturity is your retirement age. Term insurance is purchased to ensure financial security for your loved ones, especially against debts, financial liabilities, major expenditures, etc. By the time you retire, you have paid off major loans, ensuring that significant expenses are taken care of.
Also, by this time, you have accumulated significant liquid assets to take care of any sudden expenditure. Your children are or have already been settling into their own jobs and families. So, your liabilities are low.
So, when buying a term plan, subtract your current age from your retirement age. That will be your ideal policy tenure.
For the loan tenure: When you buy a term plan to secure a loan and ensure the debt repayment doesn’t shift to your family, you need to match the policy tenure to the loan tenure.
Most financial lending organisations offer term insurance accompanying major loans and advances to ensure loan repayment even in case of eventualities. Even life insurance companies now offer ‘Credit Protect’ life covers to help you protect your family from the burden of debt repayment.
Whole life cover: As we already saw, most of your liabilities are over by the time you reach your retirement age. However, there can be circumstances wherein your liabilities and financial responsibilities continue even after you retire.
For instance, you may start a business post-retirement or have a family member dependent on you. Sometimes, you may simply want to leave behind a financial legacy for your family in case of your demise. In such cases, you can buy a whole life term insurance policy.
Tata AIA Life Insurance offers a wide range of term plans that offer coverage up to 100 years of age. With a Tata AIA term plan, you also get the option of Limited Premium Payment Term, wherein you can buy a term plan and wrap up the premium payment before you retire and then enjoy coverage up to 100 years of age.
Specific life goals: You can match your term policy tenure to specific life goals - for instance, your child travelling to a foreign country for higher education, their marriage, etc. Term plan ensures that your loved ones can continue with all their life goals without any financial worries, even in your absence. Aligning the term policy tenure with specific life goals ensures that all major expenditures are comfortably taken care of in case of any eventualities.
It is extremely important to know all the term insurance benefits before you buy the plan and pay the necessary premium. In this article, we saw the meaning and importance of a policy term and how you can select the ideal tenure of your term policy.
When buying a term plan, make sure you first analyse your life goals and financial liabilities before setting your tenure. For guidance, you can get in touch with our insurance experts who are available 24x7 to help you choose the best term insurance policy for yourself.