The foremost objective of life insurance is to act as a tool in replacing one’s income in the event of the death of the breadwinner in the family. And, it is best met through a term insurance plan which is a low-cost, high cover insurance plan. A pure term insurance plan ensures that the death benefit in the form of sum assured is paid to the nominees if the life insured dies within the policy term. If the policyholder survives and outlives the term, nothing gets paid as maturity paid. The premium paid in a term insurance plan, therefore, is primarily towards the cost of insurance or the mortality charge in the policy.
How term plan works
As the name goes, the term insurance meaning is that the plan provides risk cover or life coverage for a fixed term. A term insurance plan has a fixed term and the policyholder needs to pay premium regularly till the end of the term. If the policyholder dies before the end of the term, the death benefit is paid to nominee and if policyholder survives till the end of policy, there is no maturity value.
Simply put, term insurance plan is a pure risk cover. That is, one needs to pay the premium and forget about it. Only the dependents will get an amount equal to the sum assured if the death of the insured happens within the policy term. Since they do not offer any returns, the insurance company charges you only for the cost of insurance, making term insurance the cheapest. All this because the idea is to have a replacement corpus that will protect your assets from distress sale.
As term plans are best suited to a particular stage of an individual’s life cycle it makes sense to structure term insurance purchases according to your age and risk cover needed. A uniqueness of the term plan is that unlike an endowment plan, the premium for term plan is lesser for a lesser duration. In endowment, it is more for a lesser duration.
When to buy
The best time to buy a term plan is when one actually starts earning and there is a need for the replacement of the income for the dependent. This means taking term plans early on and then as life moves on, one should keep topping up with additional coverage, could be on marriage and birth of kids. This provides you the financial freedom to invest in higher growth options such as equity mutual funds and gives you freedom to change your investment plans quickly.
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