Selecting the Right Life Insurance Policy


The advantages and disadvantages of term life insurance policies:


A life insurance policy by definition is simple: it is a policy that will provide the policy holder's family with financial cover in the unfortunate event of the policy holder's demise. When one avails of a life insurance policy, they are required to pay small payments or premiums at regular intervals. In the event of the policy owner's death, either his/her family and/or beneficiaries will receive a lump sum amount as monetary protection. Depending on the particular kind of insurance policy one opts for, one may or may not be eligible to receive the returns that are earned by the policy, if the policy holder lives beyond the stipulated maturity date.

There are several variations to this basic concept of life insurance, each catering to a different set of needs. One of these is term insurance policies.

What is a term life insurance policy?

Term life insurance policies, as the phrase suggests, are life insurance policies that provide financial cover to the family of the policy holder only for a certain period of time, or "term". What this implies is that if the insured individual expires within the given time frame as specified in his or her insurance policy, then the insurance company is obliged to provide his/her beneficiaries with the stipulated death benefit. This amount of the death is known as the 'sum assured' and is predetermined. If an individual buys a policy of Rs. 5 lakh for 10 years, and dies within the ten year period, his beneficiary is entitled to a sum of Rs. 5 lakh.

What are the advantages of term life insurance policies?

The foremost advantage of term life insurance is that it costs very little. Term policies are considerably more affordable than whole term, or permanent life insurance policies, precisely because they come with a maturity date. Moreover, many term policies include the option of converting it to a permanent insurance policy whenever the policy holder so wishes, notwithstanding any changes in the health of the insured person. Moreover, since term life insurance policies are not 'cash value' policies as are ULIPs, the cost of the monthly premiums tend to be quite low and reasonable, as well as being exempt from taxes.

What are the disadvantages of term life insurance policies?

The biggest disadvantage of term insurance policies is that they remain valid only for a certain period of time. Not only that, the premiums to be paid in a term plan will remain level only for the term itself, after which the policy holder might be expected to pay higher premiums at the time of renewal. Moreover, if the insured continues to live beyond the maturity date of the policy, he or she is not eligible to receive his or her premiums back as returns. To add to this, sudden worsening health conditions could corner the insured individual in a policy with continuously increasing premiums.

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