How Does a Term Plan Work?
Published On Jul 15, 2021
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The policy term is the duration of your life cover. If an untoward incident occurs within this period, your insurer pays the policy benefit to your nominee. You can choose your term plan’s policy tenure as per your insurance needs.
You, the person who pays for the coverage, are the policyholder. You can buy the coverage for yourself or another family member. The person whose life is insured is the life assured. As the owner, you have to pay the insurer a pre-decided premium. The insurer pays a fixed death benefit to your nominee if a contingency occurs while the policy is in force.
How Does a Term Life Insurance Policy Work?
Here are the things that you need to know about how a term life insurance works:
1. Life Insurance is a Legal Agreement
A life insurance policy, including a term life insurance plan, is a legal agreement between you and the insurance company.You, the person who pays for the coverage, are the policyholder. You can buy the coverage for yourself or another family member. The person whose life is insured is the life assured.
2. Filling Out The Proposal Form
You need to disclose the following information in the term plan application form:medical history, current health conditions, lifestyle habits, hobbies, age, annual income, nature of your profession. Based on such data, the insurer assesses the probability of your family raising a life claim. Factors that can elevate the premium amount include: A higher age, Unhealthy habits like smoking, Risk-prone hobbies like skydiving, Hazardous professions, Chronic health problems
3. Assessing Your Requirements
Decide your life cover: Your coverage should be enough to meet your dependents’ current living expenses and future needs. Children’s college fees, marriage, spouses’ old-age needs, and pending liabilities are some of the factors to consider.
- Choose your policy term: Work out the duration for which your loved ones will need financial support. It can be the time left until your children complete college or your retirement.
- Pick a premium payment mode: Term plans permit one-time payment of the entire premium. Or you can go for regular payments throughout the policy period or for a limited time-frame.
- Select the payout option: With a lump-sum payout, after repaying outstanding debts, your family can invest the rest. The returns can fund their living costs. However, if your family lacks financial know-how, you can opt for a combination of a lump-sum and a staggered payout. It ensures your loved ones never run out of funds.
- Look into riders: You can increase your base coverage with riders1 for a negligible rise in the premium. Such add-ons provide extra payouts, covering contingencies, such as deaths due to accidents.
4. Reviewing The Premium Quote
Based on your details, the insurer provides a premium quotation. When you make the payment, you get the coverage.
5. Covering Increased Insurance Needs
Increasing term plans enhance your coverage at defined intervals, overcoming inflation. Some term plans also allow you to add to your life cover at your life’s milestones when your obligations increase.
6. Assigning A Nominee
You need to name the person who will receive your term plan’s monetary benefits. It should be an immediate family member who will take care of your dependents.
Traditional term plans offer no maturity benefits. But some progressive term plans, known as Term plans with Return of Premium, now return the premium paid if the policyholder survives the policy tenure. Limited pay and one-time premium payment plans refund a part of your investment if you withdraw your policy before the termination date.
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Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.