What Is a Pure Term Insurance Plan and How It Works?

You will never know what will happen in the future, but you can prepare for it today. If you are the sole breadwinner of the family, a question may bother you: “What would happen to your family if something happened to you?

Rahul works in an MNC and is the only working member of the family. Rahul has a six-year-old daughter and recently bought a house on EMI. If Rahul were to pass away, the family would be in trouble: both emotionally and financially. His daughter may not be able to attend a good college, and if the family cannot pay the EMIs or close the loan, their home can be repossessed by the bank.

However, if Rahul has a term insurance policy, he would not have to worry about this scenario.. He can sleep peacefully at night, knowing he has a plan that will cover the home loan and secure his daughter's future.

Also Read: What is the meaning of Term Insurance

There are many life insurance plans available. A term insurance plan is one of the best forms of insurance as it is a pure protection plan.

A pure term insurance plan is an agreement between you (the policyholder) and the insurance company. In this plan, if you pass away during the policy term, a specific sum is given to your family. The tenure of term insurance policies usually ranges from  10 years to 50 years.

Below are the three key benefits of a pure term insurance plan:

• Death Benefit: In the event of your death, the nominee receives a sum assured known as a death benefit. This amount can be used by your family to cover ongoing living expenses, repay outstanding loans, or fund your child's education.
• Higher Coverage, Low Premium: Compared to other life insurance, term insurance gives higher coverage at the lowest possible premium. This is because it offers pure risk protection without any savings or investment component, making it highly cost-effective.
• Tax Benefits: You can avail of tax exemptions on the premium you pay towards the pure term insurance plan under Section 10(10D) and Section 80C of the Income Tax Act 1961. Under Section 80C, you can claim a deduction of up to ₹1.5 lakh annually on the premiums paid.
  

Features of a Pure Term Plan

A pure term plan may sound like a simple financial instrument. However, small features can make a lot of difference in your dependent’s life after a claim.

Below are the plan features you should consider while buying the plan:

• Policy Tenure: Choose a coverage tenure that will cover your retirement and a few years beyond it. This ensures your dependents remain financially protected even during your post-retirement years when income sources may be limited.
• Return of Premium Option: You can opt for this feature to ensure that you get every penny spent on the insurance plan back. With the ROP option, if you survive the policy term, you get all the premiums paid. It provides you with additional cushions in a later stage of life. This feature is suitable for those who prefer to receive some monetary benefit even if no claim is made.

• No Future Premiums: Also called a premium waiver, this feature allows your life cover to continue without premium payments if you are diagnosed with a critical illness or get permanent disability due to accidental injury.
• Additional Cover for Disability: Accidental disabilities can hurt your earning capacity. If you opt for an add-on cover, you can receive an additional lump sum in the case of permanent disability. It enhances the overall protection offered by your term plan without significantly increasing the premium.
• Child Care Benefit: You can opt for an additional sum assured till your child attains 21 years of age. If something happens to you early on, you get an additional benefit to take care of your child's education. It's especially useful for young parents who want dedicated financial cover for their children.
• Block Your Premium: You have the option to block your premium at the time you buy the policy (inception) and increase the coverage up to 100% of the base sum assured in the next five years. This protects you from premium hikes as you age or if your health condition changes.

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How Much Cover Should You Have?

A million-dollar question you will have is how much coverage to take under a term insurance plan. You should take the coverage of 10 to 15 times your annual income. For example, if your income is ₹ 10 lakh a year, you should have a total life cover between ₹ 1 crore and ₹ 1.5 crore.

To know which extreme the coverage should be, you can use the following parameters:

• Your Current Age: In the late twenties or early thirties, you have higher liabilities than assets. In such a situation, you should opt for higher coverage. In your forties, you have more assets and fewer liabilities. So you can go with low coverage (within the range).
• Expenses: Every family has different lifestyles, and your aim should be to ensure that your family continues to maintain the same lifestyle even when you are not around. Consider your family's current monthly and annual spending to estimate the level of financial support they would need in your absence.
• Loans: If you have an existing loan, factor in the total outstanding amount when deciding your term insurance cover. This ensures your family won’t be burdened with repayments for liabilities such as a home loan, car loan, or personal loan in your absence.
• Children's Education: You want to give your children the best education. To ensure they get it, calculate the education expenses, including tuition fees, accommodation, and other academic costs. Include this estimated amount in your term insurance cover so their education plans remain uninterrupted, even in your absence.
• Assets: You should also factor in your existing assets in the calculation. Let us assume, based on the above parameters, that you conclude you would need coverage of ₹ 1.5 crore. However, you have existing assets of ₹ 50 lakh that include mutual funds, fixed deposits, etc. In such a case, you can opt for lower coverage.

How to Choose the Best Pure Term Insurance Plan?

Once you know the coverage amount you need, you need to choose the best pure term insurance plan. Below are the parameters to consider:

• Insurance Company: You should look for an insurance company that has proven to be credible and has a good reputation in the market. It is a long-term investment, and you don't want to associate with an unreliable insurer and get into trouble in the years ahead.
• Claim Settlement Ratio (CSR): It is one of the essential parameters to consider. It tells you how many claims the insurance company settles per 100 claims received. Look for a company that has a high Claim Settlement Ratio.
• Solvency/Credit Rating: Look at the credit rating of the company. It indicates the insurance company's solvency, financial health, and ability to pay policyholder claims. A higher credit rating means greater financial stability and reliability.
• Premium Cost: You will have to pay the premium cost every year. Hence you must look premium amount when buying a pure term insurance policy. Choose a plan and the company that offers the desired cover at the lowest premium.
  
  Click to use: Term Insurance Calculator
• Terms and Conditions: Go through the terms and conditions and look for any grey areas or points you don't understand. Ensure there are no additional charges and understand the inclusions and exclusions associated with the policy.

Conclusion

Choose a term insurance plan that comes with all the features that secure the future of your family and more. You can get life cover up to the age of 99 years with the return of premium at the age of 60. Term plans by Canara HSBC Life Insurance come with these flexible options, along with features like premium protection and child care benefits. These are designed to adapt to your changing responsibilities over time. 

The right time to buy the term insurance plan was with your first paycheck. However, the second-best time is now. If you delay the buying of a term insurance plan, you are putting the future of your loved ones in danger. It is the best way to give financial safety to your family, so don't delay it.

Also, Read about Whole Life Insurance Policy