Table of Contents
Which Term Insurance is best? Let’s Explore!
Term insurance is a buzzword echoing everywhere in the echelons of the life insurance industry. Almost all financial gurus and experts agree that term policies are essential to your financial basket. Several benefits come bundled with term life cover, but before delving deep into its merits, let me start by explaining the actual meaning of the phrase “term insurance.” Later in this article, I will elaborate on the critical questions related to why, how, and which of term insurance. So, take a read.
What Exactly Is Term Insurance?
Term insurance is a specific life insurance with risk coverage, typically ranging from 5 to 50 years. During the policy period, the insured pays regular premiums. If the insured individual passes away within the policy term, the nominee/legal heirs receive a death benefit payout. This payout is usually tax-free, providing significant financial relief to the family. However, if the person having a term policy survives the policy period, there are no payout or maturity benefits; this is where it differs from other, more popular types of life insurance.
In simpler terms, when you purchase a term policy, you’re investing in pure life cover, thus ensuring your dependents are financially secure in the unfortunate event of your untimely demise.
Why Buy A Term Insurance?
Term insurance is the gold standard when buying insurance, as it offers much higher coverage at much lower prices. Other life insurance products typically combine investment and insurance and underperform at both objectives. Unlike other life insurances, such as whole life or endowment policies, term insurance does not carry cash maturity value or offer investment features. It is a focused life insurance product.
Remember, as a thumb rule, insurance and investment should be kept separate. Term insurance is undoubtedly the best product in the insurance sector, and this article will convince you of that. For your investment purpose, mutual funds could be the best saving and wealth-creation product available to individuals and institutions.
I have written extensively on mutual funds on this website. You can read to learn more about how mutual funds work and their seven advantages for investors.
As we delve into term insurance in this article, you may be intrigued by the safety aspects of mutual funds. After all, mutual funds are one of the best regulated and high-yielding instruments for building wealth in an organized manner. To satisfy your curiosity, read the following article on this website to understand how safe mutual funds are as an investment avenue.
What Makes Term Insurance Better?
But how does that make term insurance better? Well, due to term insurance’s focus on death benefits and the absence of maturity benefits, it comes with a lower premium. Additionally, the life coverage is significantly higher for the insurance premium paid; this is so because the insurance company only charges for mortality and administrative costs, thus providing financial security at a cheaper rate.
Thus, term insurance fulfills the core objective of buying insurance better than any other life insurance product.
Furthermore, as an established principle, people should separate insurance and investments. The understanding behind this thumb rule is that life insurance aims to mitigate risk and offer financial security to dependents in case of an unforeseen event such as the insured person’s death. At the same time, investments aim to grow wealth over time. When a product attempts to blend the two, it often results in compromised benefits on both fronts.
Term insurance is a clear go-to product when seeking life coverage, but can anyone get it at their sweet will? The answer is emphatic No! People must meet specific eligibility criteria to get the protection of term cover, which is challenging for most people desiring it. However, if you plan and work towards making yourself eligible for securing a term plan, you can increase your chances of getting a term life cover.
Entry Barriers To Getting Term Insurance
Entry barriers to term insurance can include requirements such as a stable income and established employment with consistent tax return records for a specified duration, typically three years. Having stable employment is critical in securing a term cover. An unemployed or casually employed person may suffer to qualify for term cover despite their inherited or previously earned wealth.
Furthermore, the nature of work also plays a crucial role, with some policies favoring certain occupations. Employment nature, such as a well-paying corporate job, a white-collar profession like doctors or lawyers, or a blue-collar worker like mechanics, all have a bearing on one’s chances of securing a term cover.
Additionally, stringent medical tests are often mandatory, limiting eligibility for term life insurance. For instance, smokers, alcoholics, people with diabetes, and obese people will find it challenging to get the term policy. If a company offers them a policy, it often comes with an extra premium load.
Remember that delaying the purchase of a term cover negates its cost-benefit due to the relatively higher premiums with increasing age, which results in a higher probability of mortality. People in their forties are more likely to experience higher rates of rejection. Getting a term policy at this age will likely cost more than double compared to someone in their twenties.
Despite The Barriers, Term Insurance Is Still The Best Life Insurance Option!
In markets like India, where whole life and endowment policies have historically dominated the insurance landscape, the advantages of term insurance become even more apparent.
While entire life and endowment policies may offer savings components and sometimes even marginal investment returns, they often come at the expense of high premiums and comparatively lower coverage amounts. In contrast, term insurance prioritizes providing a significant death benefit at a fraction of the cost.
Individuals can secure the life protection they need by decoupling insurance from investment without compromising on potential returns from their investment portfolios. This separation also allows for greater flexibility in adapting to changing financial circumstances and investment goals.
Thus, while the entry barriers to term insurance may pose challenges, one must work to get one as soon as possible because other life insurance options might seem easier but are much more expensive and offer much lesser life cover for the same premium.
Which Term Insurance Is Best? Let’s Find Out!
Finally, the million-dollar question is which term policy is the best? I don’t want to give a one-size-fits-all answer to this query because no such solution exists. There are several variables at play in different term policies. Let me elaborate on them and empower you to choose your best term policy.
First and foremost, the length of the term itself is critical in choosing a term policy; some term policies are only available up to a certain age, while others may offer the option of selecting a longer term, of course, at the cost of an additional premium.
Determining the appropriate length of insurance coverage based on individual circumstances and life stages is crucial. One should align the duration of coverage with the time during which dependents rely the most on the policyholder’s income. When determining the optimal term length, several factors, such as the age of children, outstanding debts, and financial goals, should be considered.
Secondly, the premium amount for a term policy can differ due to multiple factors, including the company offering it. Thus, it’s essential to compare premiums from various insurers and understand any additional fees or charges that may apply to ensure affordability over the long term.
It’s worth noting that some policies offer a “return of premium” feature. If you don’t make any claims during the term, you’ll receive a refund of a portion of the premiums paid. While this can provide peace of mind, it’s essential to remember that policies with this feature typically have higher premiums. Therefore, assessing the potential return against the added cost is necessary before deciding if it’s the right option for you.
Thirdly, In addition to basic coverage, many insurers offer riders that provide additional protection against specific risks. Critical illness riders, for example, give a lump sum tax-free payment if the policyholder is credibly diagnosed by a medical professional, sometimes two, with any of the critical illnesses covered under the policy. Similarly, Accidental death and disability riders offer additional financial support in the event of disability or accidental death, providing an extra layer of security for policyholders and their families.
Furthermore, term policies are available that offer Life-stage cover-enhancement riders, which are customized to cater to the evolving requirements of individuals as they go through different phases of life. These riders allow policyholders to adjust their coverage amount at critical milestones, such as marriage, the birth of a child, or purchasing a home, ensuring that coverage remains adequate over time.
Finally, while choosing the correct term policy, it’s crucial to consider the features and benefits and the insurer’s reputation and claim settlement ratio. A higher claim settlement ratio is a powerful indicator of the insurer’s reliability in honoring claims, which is essential for your peace of mind. This assurance ensures that your loved ones will be financially secure in your absence.
Conclusion:
In Conclusion, it can be said with considerable conviction that despite several variants and potential barriers, a term policy is the best life coverage product, and everyone with a family or dependent individuals must aspire to get one.
It is also evident that whenever possible, one must pick and choose the best policy according to their circumstances. While weighing the features and benefits of different policies is essential, procrastination can leave loved ones vulnerable after an unexpected tragedy.
Thus, the best term cover for you is the one you can get, and the sooner you ensure protection for your loved ones, the better.
Kartikay Ungrish is the Founder-director of Worthy Education Academy & Worthy Financial Services. He is a UGC NET-qualified Assistant Professor of Management, A MBA, a licenced mutual fund distributor, and a financial advisor. He helps people build wealth through prudent investments in mutual funds and other financial products. Start by creating your free wealth management account with him as your financial advisor. Contact for more details.
