Is Term Insurance An Investment Or An Expense?

Term insurance is a type of life insurance that provides coverage for a specified "term" of years. If the insured individual dies during the term period and the policy is active (i.e., premiums are up to date), a death benefit will be paid to the policy's beneficiaries.

The policy does not have any other value and is designed purely for protection, unlike whole life or universal life insurance, which also has a cash value component. This makes term insurance generally more affordable than other types of life insurance.

There are different types of term insurance policies:

• Level Term Insurance:
  The death benefit stays the same throughout the term of the policy.


• Decreasing Term Insurance:
  The death benefit decreases, usually in one-year increments, over the term of the policy.


• Increasing Term Insurance:
  The death benefit increases over the duration of the policy.


• Convertible Term Insurance:
  This policy allows the policyholder to convert the term policy to a permanent one without a medical exam.


• Renewable Term Insurance:
  This policy can be renewed for one or more terms even if the policyholder's health has changed. Each time it is renewed, premiums may be higher.
  
  The length of the term policy can vary depending on the needs of the individual but common terms are 10, 20, or 30 years. The premium, or payment, for the policy, usually remains constant over the term period.
  
  Term insurance can be a good choice for people who have a temporary need for coverage, or for those who need a large amount of coverage but have limited resources. However, because it has no cash value and eventually expires, it may not be the best solution for everyone's life insurance needs.

Common Misconceptions About Term Insurance

If you’re wondering “why should women invest in term life insurance”, then perhaps its time to dispel some of the rumours around this financial product so that the answers become clearer.

• Term Insurance is a Waste if You Outlive the Policy:
  While it's true that traditional term insurance does not provide any survival benefits if you outlive the policy term, this isn't necessarily a "waste." Term insurance is meant to be a safety net that provides financial protection to your dependents in case of your untimely demise during the policy term. Think of it like car insurance – you don't expect to have an accident, but it's essential to have coverage just in case. This is why you should be buying term life insurance policy.


• Return of Premium Plans Are Always Better:
  Some individuals believe that term plans with a return of premium (ROP) option are always better because they provide survival benefits. However, ROP plans are generally more expensive than regular-term plans. The returned premium at the end of the term often does not consider the time value of money (inflation), meaning your money could have potentially earned more if invested elsewhere.


• Only the Breadwinner Needs Term Insurance:
  This is another common misconception. While it is crucial for the primary earner in a family to have term insurance, it can also be beneficial for the spouse, especially if they provide services like child care, which would be expensive to replace.


• Term Insurance is Not Necessary if You are Young:
  Many people think that term insurance is not needed when they are young and healthy. However, it's generally cheaper to buy term insurance when you're young because the risk of health issues is lower. Also, unexpected life events can occur at any age, and having coverage can help provide financial security.


• All Term Plans are the Same:
  Term plans can vary significantly from one insurer to another in terms of features, benefits, claim settlement ratio, customer service, etc. It's essential to compare different plans and choose one that best suits your needs.


• Term Insurance Doesn't Cover Deaths due to Illness or Natural Causes:
  This is not true. Unless specifically excluded in the policy, term insurance covers death due to any reason - be it an accident, illness, or natural causes.


• Term Insurance Requires Long-Term Commitment:
  Many people think that once you buy term insurance, you have to stick to it for the long term. But term insurance policies can be chosen for a duration that suits your needs, and you can choose to stop paying premiums if the policy is no longer required. However, keep in mind that stopping payments will lead to policy lapse.

What Are The Types Of Death Covered In Term Insurance?

Term insurance covers various types of death, except for suicide within the first policy purchase. If this happens, your nominee gets a certain percentage of the premiums back. Aside from that, there are no other causes of death excluded. Term insurance covers different types of death that include –

• Natural Causes If you pass away due to old age or illness, it’ll be considered a natural death. Term insurance covers this type of fatality and ensures that your loved ones receive the benefit.
• Accidents Accidental deaths are also covered. Whether they happen at home, work, during travel, or even in extreme situations like space travel, the term insurance will pay the benefit to your family.
• Natural Disasters or Man-Made Events Deaths resulting from natural disasters like floods, storms, etc., or human-made tragedies like war, mutiny, terrorism, etc., are included in term insurance coverage.
• Adventure Activities If you enjoy thrilling activities like bungee jumping, scuba diving, kayaking, etc., and if something unfortunate happens when taking part in them, your family will still receive the insurance payout. When you add extra coverage, called riders, to your term insurance, it is important to know what they will not cover. Let’s understand this better with an example – Imagine Arjun buys a term insurance policy with a sum assured of Rs. 5 Crore. Along with it, he adds an accidental death benefit rider of Rs. 1 Crore. After a few years, Arjun tragically passes away while bungee jumping. Now, while term insurance generally covers adventurous activities like this, Arjun's accidental death benefit rider does not cover it. So, his family will only receive the Rs. 5 Crore from the base policy and not the additional Rs. 1 Crore from the rider. It is crucial to carefully read the policy details of both your term insurance policy and any riders you choose. This way, you will understand exactly what kinds of fatalities are covered and excluded.

Are Long Term Insurance Benefits Taxable?

Right now, if your nominee receives the death benefit from a term life insurance policy, they don't have to pay income tax on it, according to Section 10(10D)^ of the Income Tax Act. But it's important to keep an eye on tax rules because they might change over time.

Are Term Life Insurance Policies Renewable?

With term life insurance, you pay premiums for a set time to keep the policy active. If something happens to you during the policy period, the nominee you choose gets the death benefit. But if you make it through the term, there is no payout. Term life insurance is meant to cover only death during the policy period. Once the term is over and you are still surviving, you cannot renew or extend the coverage.

Term Insurance Expectations

Here are a few conceptions that people have in mind about term insurance -

• Wasted Payments: Spending thousands each year without the guarantee of a return feels like a waste.
• Loss If I Outlive: What if I live beyond the policy term and never need the sum assured? That seems like a loss to me.
• Comparing With Investments: To secure my future, I could put my money in a fixed deposit or recurring deposit instead of a term insurance policy and earn interest.
• Negative View On Early Death Coverage: It seems a bit too negative to invest heavily in insurance against early death.

Term Insurance Reality

Here’s what a term insurance policy actually means -

• Investing In Security: When you opt for term insurance, you are not just calculating monetary gains. It is an investment in the safety and security of your family that provides peace of mind, knowing that they will be taken care of, especially if they depend on you for their financial needs.
• Cost Versus Returns: Term policies come at a low cost with minimal premiums and a high sum assured. Outliving the policy term will not lead to significant losses.
• Fixed Deposit Versus Term Insurance Policy: While a fixed deposit may seem appealing now, the maturity amount may not hold the same value in the future due to inflation. Term insurance, with a high sum assured and low investment, is a more reliable option.
• Facing The Unpredictable Future: Considering the possibility of not being there in the future may seem pessimistic, but it is a realistic acknowledgment. Having financial coverage ensures your family is saved from at least one worry – their finances.
• Financial Freedom For Family: The sum assured from term insurance can be used without restrictions. It can cover your child's education, daily needs, or any other expenses. Some plans even provide regular monthly payments, either in part or the entire sum assured, ensuring long-term security and peace of mind for your family.

Why is Term Plan a Secure Investment?

While it's technically more accurate to consider term insurance a form of financial protection rather than an investment, there are several reasons why it is considered a secure way to protect your financial future in India:

• Financial Security for Your Family:
  The main reason to buy a term insurance policy is to provide financial security for your dependents in the event of your untimely death. The death benefit paid out by a term plan can replace your income, covering daily expenses, debts, or future needs like your children's education or their marriage.


• Affordable Premiums:
  Term insurance plans in India are usually the most cost-effective form of life insurance available. For a relatively low premium, you can secure a substantial death benefit.


• Fixed Premiums:
  Once you buy a term plan, the premiums remain the same throughout the policy term. This predictability allows for better financial planning.


• Tax Benefits*:
  As per the Income Tax Act, the premiums paid for term insurance are eligible for tax deductions under Section 80C up to a limit of INR 1.5 lakh in a financial year. The death benefit received by the nominee is also tax-free under Section 10(10D)**, adding another layer of financial security.


• Add-on Covers (Riders):
  Term insurance in India often allows you to add riders to your base policy for added protection. These can include cover for critical illness, accidental death, disability, etc.


• Flexibility:
  Term plans offer flexibility in terms of policy term and payout options. You can choose a term that matches your financial liabilities. In terms of payout, some insurers provide a lump sum, while others may offer a combination of a lump sum and monthly payouts, helping provide a regular income to your dependents.

Remember, while term insurance provides significant benefits and can secure your family's financial future, it's essential to choose a policy term and coverage amount that aligns with your financial goals and responsibilities. Always read the policy documents carefully and consider consulting with a financial advisor if needed.

Conclusion

To sum up, term insurance is an essential financial product that serves as a safety net for your family in the unfortunate event of your demise within the policy term. It is a cost-effective form of life insurance, especially when bought at a young age, and offers substantial coverage for a relatively low premium.

The idea of term insurance is based on the principle of risk protection, and while it doesn't offer maturity benefits (unless it's a return of premium plan), it provides the policyholder with peace of mind knowing their dependents will be financially secure in their absence. In India, the additional benefits of tax deductions under sections 80C and 10(10D) of the Income Tax Act further enhance the attractiveness of term insurance.

However, misconceptions abound, which can lead to hesitation in availing term insurance. It's crucial to dispel these misconceptions and understand the features, benefits, and flexibility that term insurance offers.

Moreover, considering the variety of term plans available in the Indian market, it's important to compare different plans, consider the insurer's claim settlement ratio, and opt for add-on covers (riders) if required.

Lastly, while term insurance is often viewed as a secure financial protection tool rather than an investment, the security it offers to your loved ones in the event of an unexpected tragedy is invaluable. With careful consideration and the right policy, term insurance can play a pivotal role in your overall financial planning as term insurance has value as an investment.