Information about Term Insurance
Understanding the meaning of term insurance
Before going into the details of term insurance, it is pretty important to understand the very word, ‘Life Insurance’. What it exactly means? Why we need it? Life Insurance is referred to as the protection against uncertainty, i.e., risk coverage on life. The main purpose of life insurance is to take risk covered along with an investment (in particular). By paying a certain amount as premium to the insurer, one can get insured for some specific amount of face amounts or benefits. Now, life insurance is basically of two types: Term and Permanent. All life insurance companies offer both types of life insurance to the customers.
Term insurance is an insurance policy that provides risk-cover of life, i.e., if the policy holder dies within the specified time in the policy, the beneficiary will get the death benefits. Term insurance is a cheaper insurance policy. In this policy one can avail big risk-cover amount by paying lesser amounts of premium as compared to whole life or universal life insurance policies. However, the premium amount increases with the passage of time. There is no provision of cash value in term insurance, i.e., the death benefits will be given only if the policy holder dies during the specified time period, and the premiums must be paid until then. If the insured dies after the completion of the term no death benefits can be claimed.
Different types of Term Insurance
Following are different types of term insurance policy, which are available in the market:
1) Level Term
2) Convertible Term
3) Decreasing or Increasing Term
4) Renewable Term
5) Group Term
Level Term Level term insurance policy provides protection for a specified time period during which, the premium amount to be paid, remains the same. The coverage is only for the specified time period, beyond which insurer is not liable to pay any compensation to the policyholder or beneficiary, if any mishappening occurs then. However, level term is also available in different categories, as follows:
a) Annual renewable level term
b) 5 years term
c) 10 years term
d) 20 years term
e) 30 years term
f) Term to a specified age (depends upon the policy of the insurer).
Annual renewable term covers the policy holder for one year and the insured has an option to get it renewed after every year; however, the premiums are slightly higher than the previous year.
Other level term policies that function for 5 years, 10 years or 20 years, have the premium amounts at a level for the specified time.
Convertible Term
Another type of term insurance is convertible term insurance, in which polcy holder has an option to convert term insurance to any other permanent insurance policy offered by the insurer. In this type, the insurer has to provide cover regardless of changes occurred in the health status of the insured. This insurance policy offers a greater flexibility in the features and options.
Decreasing or Increasing Term
In this type of term insurance, the amount of death benefit increases or decreases during the term of the policy; however, the premium remains at a certain level. For clear understanding, this policy provides either for maximum risk cover in the first year and will be going lesser in the coming years; or on the other hand, the amount of risk coverage increases as time passes.
Renewable Term
This type of insurance provides customers with an option to renew the policy after a specified period after the policy gets completed. But in this case, premium amount is slightly high in renewing the policy.
Group Term
Group term insuance policy is generally bought by some employer to provide cover to a set of employees. The major benefit in this term is the decrease in premium amount. Usually the payment for this policy is made by the employer. The cover is allowed for the period to which the employee works with the employer, after which the policy ends. However, there is option to convert it to an individual policy, if changes occur in employment.
Merits and Demerits of Term Insurance over Permanet Insurance
Merits
1) Cheaper—by paying lesser premiums, big risk coverage can be bought
2) No forced savings
3) Cover short term responsibilities
4) Option of conversion—can covert to a permanet policy irrespective of changes in the health status.
Demerits of term insurance
1) There is no cash value or surrender value in this policy
2) The premium amount of the policy rises as the time pass
Some general facts
Buying term insurance is simple, but it is not so easy as to apply for a policy and getting it! The application has to pass through a scanner of underwriters, which will decide the fate of the policy. The information which is given while applying for a term insurance effects both decision making at the initial stage and also when claim has to be disbursed.
As the amount of risk coverage is relatively higher in term insurance, underwriter can ask for certain additional formalities like medical check up, certain documents, and additional information, etc. However, generally, the cost incurred on medical examination is paid by the insurer itself. The application could also be rejected for certain reasons, but the chances of this are very less—agents work hard on this to get the policy passed from the underwriter!
Term insurance policy is better for short-term risks. It generally works on the principle of decreasing responsibilities. In term insurance, age is a big factor considered by companies. Younger the insured, greater will be the amount of risk cover;and increased age results in lowering the amount, or increasing the premium amounts and other formalities. It is clear that term insurance can suit both young and old, depending upon their needs and also on their ability to pay the premium!
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