Commonly asked questions about term insurance

Understanding that life insurance is an essential part of your financial plan is crucial and skipping one can bring financial setbacks to you and your family. When deciding which policy to choose, there are myriad alternatives that may bewilder you. But, a policy that checks your requirement list and provides substantial coverage to beat the ever-increasing inflation can be helpful in the future. 

A term plan is one such life insurance cover that provides compensation to the dependents of a policyholder in the event of an unfortunate demise. Since this plan kicks in only at a time when the policyholder is no more, these plans are also known as pure life insurance plans.

When selecting a term plan, there are several questions that may come to the minds of a policyholder. Some of these are about the claim settlement process, coverage within the country and outside, validity of their plan, whether the policy covers critical ailments, and more. If you also face some of these crucial questions, here’s a guide to answering these burning questions. 

1. Does the premium of the policy purchased today change in the future?

The premium of a term plan, unless specified in the policy document, remains the same throughout the entire policy tenure. This is subject to the condition that no change is brought about by the policyholder themself, meaning that the policyholder must not develop any disability or vices such as smoking or drinking. These situations alter the risk that the insurance company has to underwrite and lead to a loading (premium increase) for the policy. 

2. Is the policy impacted when a person starts smoking after a few years?

When determining the premium of a policy, the insurance company has to underwrite the risk for such a policyholder. If on a subsequent occasion, this risk increases due to habits like smoking or drinking, there is an increase in the risk that needs to be covered by the insurance company. In these situations, life expectancy may also get impacted. Thus, the insurer levies an extra charge by way of loading the premium.

3. Do term insurance plans compensate in the event of accidental death? 

Yes, term insurance plans do compensate in the event of death due to an accident. Since the demise of the policyholder is what is covered by a term plan, natural demise, demise due to illness or accidental death of the insured is covered by the scope of a term insurance plan. In these unfortunate situations, the insurance company compensates the nominees of the policyholder mentioned in the insurance policy with the sum assured (coverage amount). Further, there are various optional add-ons that can be purchased with a term plan like critical illness rider and permanent disability rider that enhance the policy’s scope. While these add-ons come at an incremental cost, you can use a term insurance premium calculator to determine its impact on the overall premium.

4. Do term plans remain valid in countries outside India?

Depending on the insurance company’s terms and conditions, the term plan may extend its coverage beyond the geographical limits of India. Just like communicating the change of address or phone number, the fact that the policyholder has relocated to a different country needs to be informed by the policyholder and the policy continues to cover it. However, some countries such as Pakistan, Burma and Somalia, are considered high-risk locations, and relocation to these countries may not offer compensation to the dependents. 

5. What happens to the term plan in the event the policyholder survives the policy tenure?

Since term plans are pure life policies, they do not offer any maturity benefit at the end of their tenure. However, at the end of its tenure, you may have the option to renew your policy. At this time, since the policy is renewed for a further tenure, the premiums are reassessed based on the risk at that time. Thus, there is a chance of an increase in premium. 

6. What are the tax benefits that are available in term plans?

When you choose term insurance, a tax benefit is available for the premium paid. Thus, the premium paid to obtain the coverage can be sought as a deduction under Section 80C of the Income Tax Act. However, when claiming a deduction, keep in mind that such deductions are only available under the old regime. The new regime does not allow any such deductions for the premium paid. Further, the compensation paid to the dependents under term insurance also enjoys tax benefit under Section 10 (10D). 

These were some of the common questions about term plans. With these commonly asked questions out of the way, you can make a smart choice of the policy based on your requirement and zero down on one. Further, to know how different policy features impact your policy, you can make use of a term insurance premium calculator.