How term insurance works?

Nov 20, 2017 | 12 months ago | Read Time: 2 minutes | By iKnowledge Team

Term plans are the purest types of life insurance policies. When you purchase such insurance, your nominees receive the benefits in case of your demise during the policy term. The primary aim of such insurance is to provide financial security to your loved ones in case of your premature demise. A term plan ensures high coverage at low premiums, thus keeping your family protected.

How term plans work

If you pass away when the term insurance policy is active, the insurer pays the sum assured to your nominees. Term plans are pure risk cover policies that offer higher death benefits. Therefore, in most instances, if you survive the policy period, no survival benefits are paid.

Term insurance coverage and premium

These types of life insurance policies are the most affordable way to acquire higher coverage. Compared to traditional life plans, term insurance premium is lower because it does not include any investment component. As there are no survival benefits, the premium on term plans is less. In some cases, the premium may slightly rise over the years because of increasing mortality risks and reducing value of money.

Options of term plans

There are different options available with a term plan.

Increasing coverage

Some term plans allow you to increase the life coverage based on which life stage you are in. This is beneficial because your financial objectives change with your life stage. The flexibility to increase life coverage ensures these goals are met even in case of an unfortunate event. However, opting for such an option will increase the premium amount accordingly.

Death benefit options

In a term insurance policy, the death benefit may be paid as a one-time lump sum amount or as a monthly income. Choose the one that suits your requirements. You may also opt for a combination of both.

Return of premium

Certain policies are classified as term insurance with return of premiums. If you buy this plan and survive the policy duration, your entire premium amount is returned. However, the premium payable to enjoy such a benefit is higher than regular term plans that offer no survival benefits. Furthermore, return of premium plans may also provide lower coverage.

Policy riders

Some term insurance plans allow you to increase riders to enhance your coverage. Few of these include disability rider, critical illness coverage, and more. However, before you choose one or more of these, you must remember that riders increase the premium amount you will have to pay on your policy.

Term plans are an excellent and affordable way to secure the financial stability of your loved ones. And, investing in one is just what your loved ones’ need for the long run.


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