A term plan essentially safeguards the financial future of the policyholder’s family members in the event of the untimely passing of the insured or him/her contracting a critical illness. Due to its relatively simple nature, it has developed the reputation of being one of the most affordable insurance policies out there. Another name that term insurance plans tend to go by are “Pure Life Insurance” policies. If you are wondering why, read on to find out.
Term Plan benefits and how it differs from other insurance plans:
The premium paid by the holder of a traditional insurance policy is divided into three main sections; namely, cost of insurance, the administration charges that are incurred, and then, investment. This means that a part of the insured’s money is invested in the financial markets, such as stocks, debt instruments and mutual funds, amongst others. However, that is not the case for term insurance policies.
Such schemes only tend to bifurcate your money in the first two out of three bifurcations which have been mentioned, namely the cost of insurance and the administrative charges. This means that all your money, after deducting the administration charged, purely goes towards your insurance cover, hence it is known as a “Pure Life Insurance”. Additionally, much unlike many other insurance policies out there, term life insurance plans do not deliver capital gains upon maturity. These are the main term insurance benefits you need to be aware of. Other Insurance policies are known as either Endowment plans or Unit Linked Insurance Plans, or ULIPs.
What are ULIPs and Endowment plans?
A ULIP works and functions like a typical investment policy. One of the most salient features of a ULIP is that a portion of the premium is invested in different equity or debt funds of the policyholder’s choice. This links the growth in the value of the fund in question. In the case of Endowment plans, the insurance company chooses the savings instruments that they want to invest in.
Additionally, since an endowment plan promises a maturity value, it requires a certain amount of investment on the insurance company’s part to meet those obligations. This inherent savings factor is one of the main reasons why the premium rates of a ULIP/Endowment plan and that of a term insurance plan differ to the extent that they do.
Why are Term Insurance premiums cheaper than those of Endowment plans/ULIPs?
One of the other reasons why the premium amounts attached to term insurance policies are low because of the risk profiles of the customers. Typically, an individual, while applying for the term insurance policies, has to undergo comprehensive term insurance medical tests. Post the same, an all-encapsulating medical report is presented to the insurer, who then determines how much of a health risk is the applicant at. An insurer only gives the applicant a policy after he or she has passed all the necessary medical examinations, giving the prospective insurance policy applicant, the proverbial “clean bill of health”.
Hence, given the overall low risk of the policyholder, the insurer chooses to charge the insured a smaller premium amount. Also, since the policyholder does not receive any kind of maturity benefit on the day he/she goes to claim the premium amount, it again reduces the overall costs of running an insurance policy for the insurance firm. The benefits of these saved costs are then transferred to the insured by way of lower premiums. Such factors contribute towards a term insurance plan, or a “Pure Insurance” scheme, to be a relatively more affordable option. You can now compare and buy term insurance online through various online portals and online term insurance calculators.