A term plan is a life insurance plan that provides financial security for the entire family in case of the unfortunate death of the policyholder. Simply put, a term plan insures one’s life in return for the premium that a policyholder pays. Right from a high sum assured at affordable premiums, to additional rider-based coverage and tax benefits, the advantages of a life insurance policy are many. However, even though these policies come with a plethora of benefits, you need to closely examine certain factors before buying a term plan.
How to be mindful of the premium with a term plan
The primary factor that you need to evaluate is the premium payable. Defaulting on premiums can cause the policy to lapse, in turn leading to a loss of coverage. For this reason, it is essential to choose a policy with a premium that is within your budget. This minimises the possibility of premium defaults.
Incidentally, term insurance plans also offer various modes of premium payment. Depending on the terms and conditions of the policy chosen, you can opt to pay your premium as a lump sum one-time amount, or you can choose to pay it periodically on a monthly, quarterly, half-yearly or even annual basis. You should always select a premium payment mode that suits you best. This will also help you plan your finances better to avoid defaulting on the premiums.
Accounting for premium amount in financial budgeting
When you are preparing your monthly or annual financial budget, it is advisable to first account for various essential expenses before spending the disposable income left over. Your term insurance premiums should be a part of the essential expenses in your budget. You can include it as a planned expense and set aside the amount necessary for your life cover as a priority each month or each year, as applicable.
Keep in mind that the premium of the policy will vary based on the sum assured under the plan. The higher the sum assured, the higher the premium. That said, it is never a good idea to reduce the cover just to make the premiums more affordable. Instead, work on understanding the ideal cover for your family and what that cover would cost. You can then reduce or eliminate discretionary and non-essential expenses to accommodate the premium costs in your budget.
If you want to plan your finances better and make budgeting for your premium easier, a term insurance calculator can help. Here, you can choose the amount of coverage, the policy tenure and the premium payment mode, and the calculator will display the estimated amount of premium that you may have to pay for the cover chosen.
Also, when calculating the premium, it is crucial to account for any additional premium payable for certain riders that you may wish to purchase. Furthermore, it is also essential to review your financial situation and your insurance requirements at different life stages, so you can increase your insurance coverage accordingly by purchasing a new term plan, if needed.
In case you are planning to expand the coverage you already have, it is important to keep the above points in mind and ensure that the premium for the new cover is also within your budget.
There is no ‘one size fits all’ rule when it comes to buying a term insurance policy, since every individual has varied needs and interests. The benefits that come with such a policy are entirely dependent on the timely payment of the premium, and taking any risks when it comes to this aspect is not advisable. Affordability is key when it comes to term policies, and every policyholder must be mindful of the same.
Avdhesh Gupta is the Appointed Actuary at Bajaj Allianz Life Insurance
