Payout Terms in Term Insurance
When it comes to term insurance, it's essential to understand the various payout terminologies. Here's a guide to help you out.
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Term Insurance (TI) is a type of life insurance coverage that offers financial protection to the policyholder's family in case of the policyholder’s untimely demise. It provides coverage for a specified period, or term, and pays out a sum assured to the nominee in case the policyholder passes away during this period. Term insurance is one of the most affordable forms of life insurance in India, making it a popular choice among those who want to ensure their family's financial security. In this article, we will discuss the importance of payout terms in Term Insurance and the factors that affect them.
Understanding Term Insurance payout terminology
Here are some crucial terms to know regarding Term Insurance payout. Please refer to your applicable policy wordings for precise details.
Death benefit
The death benefit is the primary payout that the nominee receives from the insurer in the event of the policyholder's death during the policy term. This amount is typically chosen by the policyholder at the time of purchasing the policy, and it is paid out as a lump sum to the nominee. The death benefit is tax-free under Section 10(10D) of the Income Tax Act, 1961 as per applicable terms and conditions.
Nominee
Nominee in life insurance is the person who receives the death benefit in case of the policyholder's demise. The policyholder can nominate anyone in their family, such as spouse, parents, children, or any other loved ones as the nominee.
Survival benefit
Some Term Insurance policies offer a Survival Benefit, which is paid out to the policyholder if they survive the policy term. It is important to note that adding Survival Benefit Rider to your term insurance comes at a cost and will increase the premium you have to pay. Some insurance companies also offer Critical Illness Coverage and Terminal Illness Coverage riders along with their term insurance plans.
Surrender value
If the policyholder wishes to surrender the policy before the policy term ends, the insurance company pays out the surrender value, which is a percentage of the premiums paid. The surrender value of a term insurance policy may be calculated based on the premiums paid by the policyholder, the duration of the policy, and other factors as specified in the policy terms and conditions. If the policyholder decides to surrender the policy, the insurance company will typically refund a portion of the premiums paid by the policyholder after deducting any applicable charges and fees.
Free look period
A free look period in Term Insurance is a specified period of time, typically between 15 to 30 days, during which a policyholder can review and evaluate their term insurance policy after purchasing it. During the free look period, the policyholder can carefully review the policy documents and all the terms and conditions, including the coverage amount, premium, exclusions, and other important details.
If they find any discrepancies or have any concerns, they can contact the insurance company and ask for clarification or amendments to the policy. If the policyholder decides to cancel the policy during the free look period, the insurance company will typically refund the premium amount paid by the policyholder after deducting any applicable charges or fees.
Factors affecting Term Insurance payouts
The following factors have a direct impact on Term Insurance payouts. Have a look.
1. Policy term
The policy term is the duration for which the policyholder has taken the term insurance. It determines the time period for which the policy is valid, and the death benefit will be paid out only if the policyholder passes away during this term.
2. Premium amount
The premium amount is the regular payment made by the policyholder to the insurance company for the term insurance. It is calculated based on various factors such as the age, health, and occupation of the policyholder. The higher the premium amount, the higher the payout in case of the policyholder's death.
The regularity of premium payments is also a crucial factor that affects the payout of term insurance. If the policyholder misses any premium payments or fails to pay the premium on time, the policy may lapse, and the nominee may not receive the death benefit. Therefore, it is essential to ensure that the premium payments are made on time, and the policy remains active throughout the policy term.
3. Age of the policyholder
The age of the policyholder is one of the most critical factors that affect the Term Insurance payout. If the policyholder passes away at a young age, the payout will be significantly higher compared to if they pass away at an older age. This is because the policyholder has paid a lesser premium amount and the insurance company has to pay the death benefit for a more extended period.
4. Health of the policyholder
The health of the policyholder is another critical factor that affects the payout of Term Insurance. If the policyholder has any pre-existing medical conditions or has a risky lifestyle, the premium amount will be higher, and the payout amount will be lower. This is because the insurance company assumes a higher risk in insuring the policyholder and may offer a reduced payout in case of death.
5. Reason for the death
The reason for the death of the policyholder also plays a crucial role in determining the payout amount of the Term Insurance. If the policyholder passes away due to natural causes such as illness or old age, the payout will be made to the nominee. However, if the policyholder passes away due to suicide or any other illegal activity, the insurance company may not make any payout.
6. Nominee details
The nominee is the person who will receive the death benefit in case of the policyholder's untimely demise. It is essential to ensure that the nominee details are correct and up to date. If the nominee details are not correct, there might be legal complications, and the payout may be delayed.
In case of the policyholder's untimely demise, the nominee needs to file a claim with the insurance company to receive the death benefit. The claim filing process can be a complicated and time-consuming process, and any errors or discrepancies in the claim application can delay the payout or even result in the claim being rejected. Therefore, it is essential to ensure that the claim filing process is followed correctly and all the required documents are submitted in a timely and accurate manner.
How Term Insurance payouts are calculated
The following points are taken into consideration while calculating Term Insurance payouts.
1. Underwriting process
The insurer’s underwriting process is a crucial aspect of the Term Insurance policy, as it determines the premium amount and the eligibility of the policyholder to receive the death benefit. The underwriting process involves assessing the risk involved in insuring the policyholder.
During the underwriting process, the insurance company evaluates various factors such as the age, health, occupation, lifestyle, and medical history of the policyholder to determine the premium amount. Based on the underwriting process, the insurance company may decide the death benefit.
2. Medical exams and health screenings
The insurance company conducts these tests to assess the policyholder's health condition and to determine the risk involved in insuring them. Based on the results of the medical tests and health check-ups, the insurance company may adjust the premium amount or the payout amount.
Premium amount: If the policyholder is found to be in good health, the insurance company may offer a lower premium amount, as the risk involved in insuring them is lower. On the other hand, if the policyholder has a pre-existing medical condition or is found to be at a higher risk of developing a medical condition, the insurance company may charge a higher premium amount.
Payout amount: If the policyholder is found to be in good health, the insurance company may offer a higher payout amount, as the risk involved in insuring them is lower. If the policyholder has a pre-existing medical condition or is found to be at a higher risk of developing a medical condition, the insurance company may offer a lower payout amount or may exclude coverage for certain medical conditions
Frequently Asked Questions (FAQs)
Here are some common questions and answers related to payout terms in Term Insurance.
What happens if the policyholder survives the policy term?
If the policyholder survives the policy term, there is no payout made by the insurance company in case of Term Insurance. The policy will expire, and the coverage will end. However, there are some companies that offer survival benefits.
What happens if the policyholder misses a premium payment?
If the policyholder misses a premium payment, the policy may lapse or become inactive. In such cases, the insurance company may provide a grace period to pay the premium. If the premium is not paid within the grace period, the policy may be terminated.
How is the Term Insurance payout amount determined?
From the policyholder’s perspective, the Term Insurance payout amount is determined based on the sum assured chosen by the policyholder at the time of policy purchase. The sum assured is the amount that the insurance company pays to the nominee in case of the policyholder's death during the policy term. From the insurer’s perspective, the underwriting process and the policyholder’s medical test results play a part in determining the payout amount.
Is the Term Insurance payout amount taxable?
The Term Insurance payout amount is not taxable under Section 10(10D) of the Income Tax Act, 1961, provided the stipulated terms and conditions are met.
Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.
