The concept of life insurance
Insurance is protection against loss. Every head of the family would like his/her family’s interests to be protected in case anything happens to him/her. Life insurance provides this protection. It is protection offered to the family in the event of the insured person’s death. If the insured person dies, the family faces a terrible loss. Life insurance helps to cover the financial loss a family suffers because of the death of a loved one. On the death of the insured person, the beneficiary receives a payout from the insurance agency. This offers financial protection to the family.
One of the types of life insurance is term insurance. There are mainly two types of life insurance policies. The most common type of policy is whole life insurance and the other is term insurance. Before understanding what term insurance is, let us first understand how a whole life insurance policy works.
Whole life insurance
Whole life insurance insures the life of a person for his entire life, i.e.: as long as he lives. This is the reason whole life insurance policies tend to be slightly expensive. The protection is offered indefinitely until death. Whole life policies offer investment with insurance. The policy offers a return on the money invested. The insurance policy invests the money collected and offers a return on investment in the form of interest/dividends and a bonus.
Once the insurance policy is taken for a particular sum of money (sum assured), the premium amount is decided. The amount is decided based on the age of the person at the time of the policy and based on the health condition. The premium has to be paid for a particular duration. If the person whose life is insured dies even before paying the full premium, the sum assured is paid to be beneficiary named by the person. Every year, interest and even a bonus accumulates. This increases the payout to the beneficiary when the insured person dies.
There are different variants of whole life insurance. Some offer returns to the person who is insured in the form of payments after a certain period. Some policies even invest their money in the stock market to ensure higher returns. Policies even have riders offering benefits in case of accidental death and even disability.
The main differences between a term insurance policy and a whole life insurance policy are:
- The term insurance is valid only for a particular period of time, i.e.: the term. It may be 20, 25, or 30 years. Some policies may even offer longer terms.
- There is no bonus or accumulation of cash to be handed out to the beneficiary. In case the insured person dies, the beneficiary will get the entire sum assured.
- If the insured person dies during the term, the beneficiary gets the full sum assured. If however, the insured person survives the term, then the policy lapses and is no longer valid. It can be extended, but the costs of extension could be pretty high.
As can be seen, the term insurance policy offers insurance for someone’s life for a specific term. Since the policy does not offer protection for the entire life and neither offers bonus, the premium for these policies is significantly less as compared to whole life insurance. The age of the person is the main criteria to decide the annual premium of a term insurance policy. A 10-year age difference can lead to the premium almost doubling. This is why term insurance should be taken when you are in your 30s.
Here is some additional information about term insurance that will be helpful for you when you set out to insure your life:
- Most people are swayed by the returns offered by whole life policies. In reality, investing directly in different options can fetch higher returns than what a life insurance policy offers.
- The concept of combining insurance and investment is not a good idea. Term life insurance is pure life insurance, which is the ideal form of insurance. It helps you to get higher coverage for a lesser annual payment.
- Insurance providers allow you to convert term insurance into one with permanent coverage. However, the premium amount increases. You need to check with the insurance provider on this.
- Some policies allow you to increase the term of the policy on payment of an additional amount.
- There are term insurance policies that can be linked to your mortgage. Its value reduces proportionately to your mortgage amount due. The concept here is that if anything happens to you, the mortgage can be paid using the insurance payout.
- A person ideally uses this insurance for the duration during which he/she is working and taking care of the family. During this time, if the person dies, it would cause severe financial loss for the family. Term insurance allows the beneficiary to get a significant payout on death of the insured person.
Should you buy a term life insurance? The answer is a big YES! Term insurance policies cost very less as compared to regular whole life policies. They do not club insurance and investment and hence are cost-effective. A 30-year-old male can take a term life insurance policy of $1 million for a 30-year period by paying an annual premium of around $660. If the same policy were to be a whole life insurance policy, the annual premium would be more than $9250[i].
This represents huge savings for the insured person. An amount of $660 works out to be a little more than $50 per month, which is affordable. It is a very good option where the beneficiary can get an assured sum of money just by paying a small annual premium. It is definitely a policy worth taking.