Sunday, August 27, 2017

What is a term plan and its pros and cons


What is a term plan and its pros and cons


Term life insurance is insurance in the purest sense. It covers risk to the life of the breadwinner. In other words, it secures the family of the breadwinner against the financial consequences of the untimely demise of the breadwinner. It provides an income replacement to the family following the death of the breadwinner. The pros and cons of a term insurance plan are:
Pros:
1. Cheap and inexpensive
A term life insurance is supposed to be one of the cheapest insurance plan. It is an inexpensive way to secure one's family's future so that they do not have to be financially burdened in the absence of their breadwinner.
2. Tax savings
Investment in a term plans give one tax savings. In India, all the premiums that you pay in a term plan are deductible from your taxable income upto an amount of Rs.1,50,000/- under section 80C of the Income Tax Act,1961. Even the payout that the family will receive on demise of the policyholder is non-taxable in his or her family's hands.
3. Opportunity for higher Sum Assured
The Sum Assured that one can buy per unit of premium paid is substantially higher than that of other life insurance plans like ULIPs, endowment plans and other savings-cum-investment plans. This gives one the opportunity of buying a higher cover for a smaller premium, thus securing his or her family completely and giving them an income replacement when one is not around to support them.
4. Convenience of purchase
Buying a term plan is very simple. Most term plans are available online at a few clicks. Just fill an online form, make the payment using net banking or your credit card. The application will be processed and the medicals done at either your home or a medical facility centre. Once the underwriting approves the policy, the policy bond will delivered at your doorstep. Underwriting declines a policy, if you already suffer from Diabetes, Hypertension or any other major metabolic disorder of lifestyle diseases. Otherwise, most policies get approved from underwriting.
5. Simple to understand
A term plan is very simple to understand. There are no jargon or tables that you need to understand or comprehend. This makes it simpler to manage. The customer just pays the premium and his for her family receives a fixed sum on his or her death.
Cons
1. No maturity benefit
There is no maturity benefit in a term plan. If you outlive your policy, or in other words, are alive when the policy terminates, you get nothing back from the insurance company. No proportion of the the premiums that you may have paid will be returned back to you. Although there is an exception in certain policies where a certain amount is paid back, but it will always be far less than what you may have paid by way of premiums.
2. Motivation dying down
Since there are no maturity benefits, at a later stage in the policy, the policyholder may lack the motivation to keep on paying the premiums. If the premiums are not paid, the policy lapses and terminates without any returns. This is something that generally happens if you've paid for 10 odd years and feel disinterested in paying the premiums for the rest of the policy term.
As you see, the pros of a term policy far exceed the cons and hence it is a good inclusion in your life insurance portfolio.

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