Ashok worked for the merchant navy and stayed away from home for more than six months at one time. Back home he had a dependent wife, a daughter 4 years old, and dependent parents. The financial condition of the family was sound because Ashok’s father had also served in the army who received a pension to serve his means. The monthly salary of Ashok was sufficient to help the needs. But he thought that the amount was not enough to take care of the future requirements. Ashok discussed the matter with his colleague and decided to buy term insurance to create financial security for his family.
If you are equally worried about the family’s future and think that you must secure finances for them, you must buy a term insurance policy.
Let us look at what is a term insurance policy.
What is a Term Insurance Policy?
Term Insurance is a pure life protection cover that provides life cover for a specified period of time. If the life insured passes away, the insurance company pays a guaranteed payout to the nominee as declared under the policy.
Term insurance policy saves the nominee and the dependents from the loss of income. Other than this, the life insurance cover also provides benefits to avail income tax deductions.
- The term insurance plan is cost-effective but the limit of cover is high.
- Under term insurance, there is a provision to expand the scope of cover with additional rider covers.
- This type of life insurance does not provide a survival benefit unless you opt for the Return of Premium Option. The policy option pays all the premiums back only if all the premiums are paid.
Read More: What is Term Insurance?
Benefits of Term Insurance.
The term insurance policy provides these benefits:
- Whole Life Cover: The term insurance policy provides you cover till 100 years of age. It is a long cover duration that provides you security and peace of mind for a longer time.
- Affordable Premium: Get term insurance at a low cost and for high coverage limits. For example, you can get a term plan for Rs.1 crore at Rs.490/month.
- Compensation on the death of the life insured: If the life insured passes away during the policy period, the nominee or legal heir as declared under the policy receives a sum assured as compensation. In order to address the clear financial requirements, the policyholder can choose to receive the benefit either in a lump sum or as a monthly payout.
- Critical Illness Cover: If you have opted for the critical illness additional cover, the policy pays you in a lump sum upon diagnosis of any of the specified critical illness diseases. The condition applies only if you have taken the cover at an additional premium rate.
- Accidental Death Benefit: The cover provides protection against any accidental mishappening that takes place with the policyholder.
- Terminal Illness Cover: Terminal Illness is an in-built cover in the term plan. On the diagnosis of the illness, the insurance company will pay you a lump sum amount.
- Tax Benefit: Term Plan brings for you tax benefit on premium paid under Section 80C of Income Tax Act, 1961. The lump-sum amount that is received by the nominee is also exempted from tax under Section 10(10D) of the Income Tax Act.
Does Term Insurance Help You Save Tax?
Yes, term insurance helps you save tax. You must buy term insurance to help your family battle loan liabilities in your absence. While the tax benefit of the insurance plan is already mentioned above, you can buy the term plan for its several benefits linked.
Tax Benefits of Term Insurance Plans
Buy a term insurance plan to enjoy tax benefits to save money on the tax outgo while financially keeping secure the future of the loved ones. Let us further read the implications of tax benefits under different Sections.
- Term insurance provides tax benefits under Section 80C of the Income Tax Act, 1961. In common people treat it as the most affordable tax-saving tool. Under the section, you can get a tax deduction up to Rs.1.5 lakhs for the premium you have paid for buying the plans.
- Under Section 80C, tax deduction can be claimed only if the premium you have paid is not more than 10% of the sum assured when the policy has been issued after 1st April 2012.
- The deductions apply when the premium paid is not more than 20% of the sum assured, if the policy was issued before 1st April 2012.
- In a particular scenario, if the life insurance policy covers a disabled referred to under Section 80U or disease guided to under Section 80 DDB, the deductions can be claimed under Section 80C but only if the premium should not exceed 15% of the sum assured.
Other than tax benefits, here is the purpose of buying a term insurance plan.
Why should you buy a term plan?
You can buy a term plan as it provides you cover for:
- Cost-effective premium at Rs.490/- per month for a cover of Rs.1 crore.
- Sum assured after the unfortunate event/death of the policyholder.
- Longer cover with the option to be covered till 100 years of age.
- Option to get cover for critical illnesses.
- You get cover for inbuilt terminal illness on diagnosis of which a lump sum benefit is paid out.
- You can make a choice to pay premiums on a monthly, yearly, semi-annually, or quarterly basis.
After analyzing the purpose of buying a term plan, here are a few things to consider before buying the policy.
Tips to choose the best Term Plan.
Here are some of the tips you can keep a note of before choosing the term plan:
- Premium Payment Term: Look for a plan that provides you the flexibility to choose the premium payment term. If you are comfortable, you can decide to pay the premium in a lump sum or pay it in monthly installments.
- Check for the premium amount: Term plans are famous for their low cost. You get maximum coverage at less price which is a good deal.
- Insurer’s Solvency Ratio: Find out or ask for the insurer’s solvency ratio which indicates the claim settling financial capacity of the family. The favorable solvency ratio is 1.5.
- Insurer’s Claim Settlement Ratio: You would trust a company that settles the claims as fast as possible. If the claim is settled quickly, the financial strength of the company can be identified which brings in mental satisfaction after buying the product.
- Features Offered by the Plan: Check the features offered by the plan to understand the scope of cover.
- Rider Covers under the Plan: See whether you are allowed to buy additional covers under the plan or not. If yes, then what is the price you will have to pay. Also, check the list of additional covers that you can buy. Keeping in mind the current scenario and spread of diseases, you can buy critical illness cover, accidental death, and disability rider, etc.
You can claim for the tax benefit till the end of the policy term or till the time claim is not made in the policy. A term plan helps in getting tax benefits and enables the dependents in the family to manage expenses after the policyholder passes away. Buy policy to get the maximum benefit but before that check for the conditions that you must fulfill.