TeamAckoNov 2, 2023
A life insurance policy can help the family members deal with financial consequences if the policyholder dies unexpectedly. Acknowledging the importance of the right insurance policy, policyholders should be careful while selecting their plan. In most cases, the evaluation process requires a close look at three things: premium payment, duration of the policy (also called policy term) and the benefits. Usually, the focus is on the premium and the benefits, but the policyholder also needs to ensure that choosing the right policy term aligns with their financial goals and needs. Read ahead to know more about the policy term in life insurance.
The policy term is the maximum period for which the life cover in the insurance policy will remain active. It is usually determined at the time of choosing the policy and purchasing the insurance plan. Normally, companies offer a policy term ranging from five to 40 years. However, once the policy term period is set, it cannot be changed. Thus, you need to be careful in deciding the policy term for your life insurance plan.
Here are some pointers to keep in mind before closing on the right policy term.
Financial goals or needs: People have different financial goals and needs and some insurance plans are designed specifically to offer financial protection for users and their dependents. For instance, Term Insurance provides a sum of money to the dependents, in the unfortunate event of the policyholder's death. The earlier one begins the Term Insurance plan, the more money the dependents will get.
Take the example of Raman, who bought a Term Insurance cover of Rs. 50 lakhs for 35 years. He passed away in the 30th year. In this case, the insurer paid Rs. 50 lakhs to his nominee. In this case, even if the policy term was not complete, the nominee got paid.
Some other insurance plans provide financial protection only upon the end of the policy term. Take the example of Preetha who had taken an Endowment Plan with a policy term of 20 years and with the payout option as a lump sum at the end of the term. If Preetha survives the policy term, she will get the payout after maturity.
Policyholders need to assess what aspects they require financial support for, while choosing insurance plans and policy terms. It could be for everyday requirements like living expenses, as well as long-term goals like children's marriage or education.
Age of the insured: One of the most important things the policyholder needs to think about is the age. Some policies such as pension savings plans have a shorter policy term. The best thing about Term Insurance is that policyholders can start whenever they want. But, if they start in their twenties, they can have a policy for up to 40 years and enjoy better benefits.
Maximum allowed policy term: Generally, a policy term offered by insurance providers is between 5 years to 40 years or till age 99.
Depending on the type of policy, here are the recommendations for the policy term.
Term Insurance: At the very least, the length of a Term Insurance policy should cover the policyholder until they retire. It can also last as long as the person is 99 years old.
Guaranteed Savings Plans & Whole Life Insurance with a guaranteed maturity value: Most guaranteed savings plans have a policy term of at least 10 years. So, policyholders should only use the policy for the right kinds of financial goals. Regarding the maximum policy term, guaranteed savings plans with an assured maturity value can last until the person is 99 years old.
Guaranteed savings plans with an option to get money back: A money-back plan is ideal for those who are looking for a guaranteed return on investments and regular payouts, in addition to insurance coverage for themselves. These guaranteed savings plans have a 10-year minimum policy term, while the policyholder can be up to 99 years old to avail of the same. Keep these conditions in mind while choosing the policy term. And keep in mind that the term for cash flow might be different from that of the policy term. Policyholders should make sure that the cash flows from the policy match their financial needs, such as paying for their child's college or saving for retirement.
Plans for insurance based on units (ULIPs): The minimum policy term is 5 years for ULIP-linked plans and the maximum is when the insured is 99 years old. With tax-free withdrawals, a ULIP plan can be useful for a long time after retirement. Once the insured person has enough money saved up, they can take out the money in small amounts to build a tax-free pension revenue stream.
Pension Plans: Pension plans generally have a shorter policy term, with some of the insurance providers offering a term period of up to 12 years, and the industry’s average maximum policy is 10 years. There is a vesting age for pension plans that offer deferred annuities. The vesting age can be anywhere between 40 and 65 years old. For example, if a policyholder wants to start getting their pension at age 60, they have to be at least 50. While different policy terms are suitable for different plans, the general norm is that, with longer policy terms, the benefits get better.
So, investors who stick with the policy for a long time can see their money grow faster. Since the policy term can't be changed once the insurance plan is bought, it must be a carefully considered decision to choose the right policy plan.
Now that you are aware of the need to choose the right insurance plan with the optimal policy term, it is important to understand the difference between the Policy term and the Premium Paying term.
Policy term is the life of the insurance policy, after which the policy matures and the insured can avail benefits, if applicable.
When people avail of a policy, they also pay an annual premium for a certain number of years, to keep the policy afloat. The duration until when you pay the premiums is called the Premium Paying term.
Sometimes, the policyholder would pay premiums until the end of the policy term and sometimes it could be for a shorter duration. For instance, if Shalini, who is 25 years old, takes a Term Insurance plan with a policy term of 40 years, her policy would mature when she turns 65. However, she also availed a premium paying time of 25 years. This means that she would need to pay premiums until she turns 50 and not after that. But, the policy would continue to be active until she turns 65. This is an example of when the premium paying time is less than the policy term.
Policy term means the period till which your insurance plan remains active. If applicable, you can avail of the maturity benefits till the end of the policy term.
Maximum policy term denotes the maximum term period up to which an insurer offers a policy. Sometimes, it can go up to 40 years. Policy maximum is the maximum amount that the insurance provider will pay for covered services and expenses.
Policy term is the total duration until the policy remains active and the insured person can utilise benefits. Maturity is the time when a policyholder survives the policy term and they can avail benefits.
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.
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