Term insurance policies have gained several takers in recent years despite not being as widely advertised as other products like money-back insurance policies. The internet has allowed people, particularly those without a background in finance, to access information and familiarize themselves with aspects of personal finance, which explains its popularity.
Insurance planning is to determine and ensure appropriate insurance coverage (life, healthcare, and disability) against any possible risks in one’s life. It is a crucial component of financial planning.
There are several different kinds of insurance, including but not limited to life insurance, disability, healthcare or medical insurance, motor, travel, and property insurance. What sets apart a life insurance policy from other products is that it is not bought for the insured individual’s benefit. Anyone buying life insurance in their name does so with an intent to provide continued financial support to their loved ones in the event of their death.
A life insurance policy helps the policy beneficiaries manage the future expenses and financial obligations and maintain the lifestyle they were used to living before the insured’s death. Insured individuals are typically the primary providers of households or senior members of their family, with several dependents (spouse, children, etc.). Hence, their death would result in the loss of income for the household.
This article analyzes the concept and the benefits of term insurance compared to the lesser-known personal accident insurance policy.
What Is Term Insurance?
Term insurance is a life insurance product structured to provide coverage for a limited, pre-specified period. Death benefits are paid out to the nominee if the insured dies while the policy is active.
They have become such a popular product that there are several readily available online term insurance plans with insurers offering guaranteed1 annual renewals at fixed premiums for a set number of years or a set term. It could be a 20-, 30-, 40-year policy, determined by a maximum age limit. Beyond that, one’s premiums will likely become more expensive. In a nutshell, the earlier in life one purchases term insurance, the lower the premiums will be.
The frequency of premium payments has also been made flexible. They may be monthly, quarterly, or yearly.
Term policies are among the purest available forms of life insurance products. Unlike money-back policies and other policies, there is no promise of investment gains from one’s premium payments. Once term insurance coverage of the insured expires, neither will the insured receive any payout upon death nor will he/she earn any amount on the premium payments.
There are several benefits of term insurance such as:
Low premiums: Since these policies do not promise any maturity benefits to the buyer, the premiums are low.
*Tax benefits: Tax benefits on premiums payments under Section 80C of the Income Tax Act, 1961 are applicable.
Discounts: Some insurers offer a further discount on premium rates on a higher sum assured.
Personal Accident Insurance
Personal accident insurance is structured to provide coverage against death or permanent disability caused by accidents. The product is not widely advertised, which is why the concept is less familiar to consumers. Term insurance plans suffered a similar fate until a few years back.
The benefit of personal accident insurance is that the payout will help the insured continue to meet financial obligations and goals, even if the insured suffers an accidental permanent, partial, or total disability, leading to loss of all future income.
Given that term insurance and personal accident insurance both offer death benefits, what sets them apart?
Personal accident insurance only covers death caused by accidents, while a term policy provides coverage against death resulting from an accident or natural causes.
However, term insurance is limited to offering death benefits. An advantage of personal accident insurance is it offers coverage against medical expenses and disabilities arising from accidents. The payout from such insurance policies can help an individual maintain a particular lifestyle or meet basic financial expenses even if any accidental disability results in the loss of his/her job or income source, an aspect not covered by a term plan.
Personal accident insurance could be purchased to supplement insurance coverage provided by term insurance plans.
The cost of premiums on a combination of term insurance and a personal accident insurance policy will be especially reasonable for individuals employed in high-risk professions.
TATA AIA Life Insurance also offers various term insurance plans with additional provisions or riders# that provide coverage against unforeseen accidents, such as death or dismemberment of the insured.
Meanwhile, how much insurance coverage an individual requires depends on several factors unique to the individual. To calculate the insurance coverage requirements, the individual seeking insurance can start by determining his/her assets. Assets refer to one’s monthly income and liquid assets, such as cash readily available in one’s savings account. The second step includes computing one’s monthly expenses and any existing debt obligations. E.g., home or personal loans yet to be paid back in full.
The difference between one’s existing total financial obligations, including monthly expenses and liquid assets, will roughly determine the required coverage. In short, the point of insurance is to help an insured individual’s nominees meet financial obligations and maintain their lifestyle even after the insured’s death.
On the other hand, the premiums that the buyer will have to pay to secure an insurance policy depend on many factors apart from the insurance coverage required. The policy buyer’s age, income, lifestyle, profession, marital status, etc., are considered before the premium is determined. Purchasing insurance as early in life as possible is usually recommended. And one must continue to revisit their insurance coverage needs as they age or their family grows. Some factors like a complicated family medical history or a smoking habit usually mean a higher premium.
With the ready availability of online insurance plans, a well-read individual can acquire sufficient insurance to secure his/her financial future.