Understanding Term Insurance and How it Works!

Understanding Term Insurance and How it Works!PolicybazaarAverage Rating / 5 ( reviews)
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Term insurance is amongst the oldest and the simplest form of insurance that includes the payment of sum assured upon the death of the insured. However, the sum assured is paid only when policyholder’s death occurs within the term or tenure of the policy.

In case the policyholder survives until the term ends, then the plan will cease & nothing will be paid by the insurer.

Term life insurance isn’t an investment, but an expenditure. Just as the premiums paid for the car, no benefit will be received if the event for which the policy was bought, does not take place and no claim has been filed.

Then, why would you purchase a term plan?

Because it offers mental peace throughout your life and risk coverage after your death.

How Does Term Insurance Work?

Apart from being amongst the most economical and affordable kind of life coverage, term insurance is a simple and straightforward product. It offers protection for you and your loved ones for a particular period of time.

The main characteristic of this type of insurance can be guessed easily by its name- the duration or term of the policy. It refers to the number of years a term life insurance policy will provide protection for your beneficiary/beneficiaries.

Usually, the term length ranges from ten, fifteen, twenty, or thirty years. In case of your unfortunate death during the term of the policy, the insurance payout of the plan, called the death benefit, will be given to the beneficiary/beneficiaries designated by you.

How to make use of this death benefit is up to the beneficiaries. It can be used to make payment for rent, mortgage, your kid’s educations, or help clear the existing debts. Hence, in case of your demise, this benefit will help your family in coping up with their financial needs during their tough times.

A term plan may offer coverage during the years it is needed the most. For instance, if you are parent young kids, you may want coverage, which at least lasts till the time they finish their education. Or if you are couple who has recently bought their first house, then then you must select the term length, which lasts till the time the mortgage has been paid off.

When you purchase a term life insurance, the insurance provider promises that they will make payment of a set amount to your beneficiary if you pass away during the policy term. In exchange for this, you need to pay a premium amount on a monthly basis while the policy lasts.

You must always remember these points about a term policy.

  • Because you do not have the option of changing the amount of cover during the term of the policy, if in case you feel that the amount is not enough, you will have to purchase an additional term plan for getting extra coverage.
  • In case you outlive the term of the policy, the insurance will terminate and you will have to purchase another plan if you still want life coverage. However, the premium amount for the other term life insurance policy will be higher as older age as well as health conditions (if any) will be accounted for. Hence, it is essential that you choose an appropriate term duration early in your life.
  • The calculations of the insurance rates are dependent upon life expectancy. This is the reason life insurance costs rise as you grow older.

The Bottom Line!

A life plan acts as a cornerstone for your financial planning as it gives protection to what matters the most in life- your loved ones. For a person who has financial dependents to have life insurance. Here, term insurance becomes a popular choice because it’s a simple as well as economical types of cover that offers financial protection to your family when you are not around them.

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