Life insurance is a contract between an insurer and a policyholder in which the insurer guarantees payment of a death benefit to named beneficiaries upon the death of the insured. The insurance company promises a death benefit in consideration of the payment of premium by the insured.

How Life Insurance Works

There are three major components of a life insurance policy.

1. Death benefit is the amount of money the insurance company guarantees to the beneficiaries identified in the policy upon the death of the insured. The insured will choose their desired death benefit amount based on estimated future needs of surviving heirs. The insurance company will determine whether there is an insurable interest and if the insured qualifies for the coverage based on the company's underwriting requirements.
2. Premium payments are set using actuarially based statistics. The insurer will determine the cost of insurance (COI), or the amount required to cover mortality costs, administrative fees and other policy maintenance fees. Other factors that influence the premium are the insured’s age, medical history, occupational hazards and personal risk propensity. The insurer will remain obligated to pay the death benefit if premiums are submitted as required. With term policies, the premium amount includes the cost of insurance (COI). For permanent or universal policies, the premium amount consists of the COI and a cash value amount.
3. Cash value of permanent or universal life insurance is a component which serves two purposes. It is a savings account, which can be used by the policyholder, during the life of the insured, with cash accumulated on a tax-deferred basis. Some policies may have restrictions on withdrawals depending on the use of the money withdrawn. The second purpose of the cash value is to offset the rising cost or to provide insurance as the insured ages

What Is Term Life Insurance?

Term life insurance, also known as pure life insurance, is life insurance that guarantees payment of a stated death benefit during a specified term. Once the term expires, the policyholder can either renew for another term, convert to permanent coverage, or allow the policy to terminate.

How Term Life Works

Term life policies have no value other than the guaranteed death benefit. There is no savings component as is found in a whole life insurance product. The policy's purpose is to give insurance to individuals against the loss of life. This cash benefit may be used by beneficiaries to settle the policyholder's healthcare and funeral costs, consumer debt, or mortgage debt, among others. Term life insurance is not used for estate planning or charitable-giving purposes. All premiums cover the cost of underwriting the insurance. As a result, term life premiums are typically lower than permanent life insurance premiums.

Characteristics of Term Life

The basis for term life premiums is on a person’s age, health, and life expectancy, which is set by the insurer. If the person should die within the specified policy term, the insurer will pay the face value of the policy. Should the policy expire before the policyholder's death, there is no payout. Policyholders may be able to renew a term policy at its expiration, but their premiums will be recalculated for their age at the time of renewal.

Because it offers a benefit for a restricted time and provides only a death benefit, term life is usually the least costly life insurance available. A healthy 35-year-old non-smoker can typically obtain a 20-year level-premium policy with a $250,000 face value for $20-$30 per month. Purchasing a whole life equivalent will have significantly higher premiums, possibly $200-$300 per month. Because most term life insurance policies expire before paying a death benefit, the overall risk to the insurer is lower than that of a permanent life policy. The reduced risk allows insurers to pass cost savings to the customers in the form of lowering premiums.

Example

Thirty-year-old George wants to protect his family in the unlikely event of his early death. He buys a $500,000 10-year term life insurance policy with a premium of $50 per month. Should George die within the 10-year term, the policy will pay George’s beneficiary $500,000. Alternatively, George does not die and is now 40 years old. His term policy has expired. If he chooses not to renew and subsequently dies, his beneficiary receives no benefit. If he decides to renew the policy, the new policy will base the premium on his current 40 years of age.

Given the nature of such policies, if a policyholder were diagnosed with a terminal illness during a term, once that term expired the individual would not be likely be insurable, though some policies offer guaranteed reinsurability (without proof in insurability). Such features, when available, tend to make the policy cost more.

Term Life Premiums

An insured's age, sex, and health are the primary determinants for calculating the policy premium. Depending on the policy's face amount, a medical exam may be required. Other common factors are the insured's driving record, current medications, smoking status, occupation, hobbies, and family history.

Premiums are flat, or level, for the duration of the contracted term. However, the cost of insurance increases as the life expectancy of an insured decreases. Upon renewal, the policyholder will likely realize a significant increase in premiums. Based on actuarial data, the average life expectancy in the U.S. is 78.86 years. Therefore, a 20-year-old person has a remaining life expectancy of 58.86 as compared to a 50-year-old with a remaining life expectancy of 28.86 years. The risk to underwrite insurance for the 20-year-old is less than the risk to cover a 50-year-old person.

Interest rates, the financials of the insurance company, and state regulations can also affect premiums. In general, companies often offer better rates at "breakpoint" coverage levels of $100,000, $250,000, $500,000, and $1,000,000. Three Types of Term Life

Term insurance comes in three different flavors, depending on what works best for you.

1. Level term, or level-premium, policies
   These provide coverage for a specified period ranging from 10 to 30 years. Both death benefit and premium are fixed. Because actuaries must account for the increasing costs of insurance over the life of the policy's effectiveness, the premium is comparatively higher than yearly renewable term life insurance.
2. Yearly Renewable Term (YRT) Policies
   (YRT) policies have no specified term, but are renewable every year without requiring evidence of insurability each year. Early on, premiums are low, but as the insured ages, premiums increase. Although there is no specified term, premiums can become prohibitively expensive as individuals age, making the policy an unattractive choice for many.
3. Decreasing term policies
   These have a death benefit that declines each year according to a predetermined schedule. The policyholder pays a fixed, level premium for the duration of the policy. Decreasing term policies are often used in concert with a mortgage to match the coverage with the declining principal of the home loan.

Who Will Benefit From Term Life?

Term life insurance is attractive for young couples with children. Parents may obtain large amounts of coverage for reasonably low costs. Upon the death of a parent, the significant benefit can replace lost income.

They are also well-suited for people who temporarily need specific amounts of life insurance.For example, the policyholder may calculate that by the time the policy expires, their survivors will no longer need extra financial protection or will have accumulated enough liquid assets to self-insure.

Term Life vs. Permanent Insurance

The choice between a permanent policy with cash-value insurance product such as whole life or universal life and term life coverage depends on the circumstances and needs of the policyholder.

Cost of Premiums

Term life policies are ideal for people who want substantial coverage at low costs. Whole life customers pay more in premiums for less coverage, but have the security of knowing they are protected for life.

While many buyers favor the affordability of term life, paying premiums for an extended period, and having no benefit after the term's expiration, is an unattractive feature. Upon renewal, term life insurance premiums increase with age, which may make new premiums cost-prohibitive. In fact, renewal term life premiums may be more expensive than permanent life insurance premiums would have been at the issue of the original term life policy.

Availability of Coverage

As noted above, unless a term policy has guaranteed reinsurability, the company could refuse to renew coverage at the end of a policy's term, if the policyholder developed a serious illness. Permanent insurance provides coverage for life, as long as premiums are paid.

Investment Value

Some customers prefer permanent life insurance because the policies can have an investment or savings vehicle. A portion of each premium payment is allocated to the cash value, which may have a growth guarantee. Some plans pay dividends, which can be paid out or kept on deposit within the policy. Over time, the cash value growth may be sufficient to pay the premiums on the policy. There are also several unique tax benefits, such as tax-deferred cash value growth and tax-free access to the cash portion.
Financial advisors warn that the growth rate of a policy with cash value is often paltry compared to other financial instruments, such as mutual funds and exchange-traded funds (ETFs). Also, substantial administrative fees often cut into the rate of return. Hence, the common phrase "Buy term and invest the difference." However, the performance is steady and tax-advantaged.

Other Factors

Apparently, there is no one-size-fits-all answer to the term vs. perm insurance debate. Other factors to consider include:

• Is the rate of return earned on investments sufficiently attractive?
• Does the permanent policy have a loan provision and other features?
• Does the policyholder have or intend to have a business that requires insurance coverage?
• Will life insurance play a role in tax-sheltering a sizable estate?

Convertible Term Life

Convertible term life insurance is a term life policy that includes a conversion rider. The rider guarantees the right to convert an in-force term policy—or one about to expire—to a permanent plan without going through underwriting or proving insurability. The conversion rider should allow you to convert to any permanent policy the insurance company offers with no restrictions.

The primary features of the rider are maintaining the original health rating of the term policy upon conversion, even if you later have health issues or become uninsurable, and deciding when and how much of the coverage to convert. The basis for the premium of the new permanent policy is your age at conversion.

Of course, overall premiums will increase significantly, since whole life insurance is more expensive than term life insurance. The advantage is the guaranteed approval without a medical exam. Medical conditions that develop during the term life period cannot adjust premiums upward. However, if you want to add additional riders to the new policy, such as a long-term care rider, the company may require limited or full underwriting.

Term insurance plan is a form of life cover, it provides coverage for defined period of time, and if the insured expires during the term of the policy then death benefit is payable to nominee. Term plans are specifically designed to secure your family needs in case of death or uncertainty. It provides specific amount of coverage for specific period of time.

1. Why is the preimums charged for taking a Term Insurance Policy very low?

The premiums for Term insurance policies are the lowest among all the types of life insurance policies. The premiums are low since there is no investment component and the entire premium goes for covering the risk. So if the policy holder expires during the insured term, the death benefit is paid to the nominee. There is no survival or maturity benefit once the policy term expires. There may be some plans that offer to return the premiums paid by the policy holder if he survives.

2. How to choose a best term plan? To choose best term plan you should consider important factors like:

• How good is the insurance company
• How much cover do you need
• Check the claim settlement ratio
• The factors of inflation in paying the premium and coverage benefits
• Compare the terms and conditions of various insurance companies
• You can take two term insurance plans from two different insurance company, it will save you in case of rejection of claim from one of either two companies
• Do not just look for the low term insurance plan as they might be an important factor but may have several conditions attached for the time of claim
• You can also go for an online or offline term plan

3. Is there much difference in premium across term plans?

The premium in the term plan could vary from one company to another and as the tenure of your policy increases, the premium for the same sum assured increases.

4. Are there any eligibility criteria for term insurance plan?

The eligibility criterion for term insurance plan varies according to the insurers, the minimum age of entry is 18 years and the maximum age limit is 65 years.

5. Do term insurance plan have an option to convert it to other traditional plans?

The convertible option is provided to you in term insurance plan, and you can convert it to the whole life insurance policy or the endowment plan any time during policy tenure without additional charges.

6. If I missed a premium, is there a chance that my policy may lapse?

If you miss the premium then the first thing is to know the status of your policy through your agent or insurance company. According to Life Insurance Corporation of India (LIC) a grace period of 30 days is allowed where the mode of payment of premium is yearly or half yearly and 15 days in case of monthly payment.

7 Can I surrender an insurance plan?

Yes, you can surrender an insurance plan that is to exit from a plan before maturity. From this the surrender charges would be deducted which varies from policy to policy. No charges are levied if the surrender is done after five years.

8. What are the risks involved in surrendering an insurance plan?

You should only terminate the policy if you feel that it does not fulfil your requirements and if you are in need of cash with no other options left. If you surrender the policy early i.e. three years from its inception then surrender value would be at least 30% of premiums paid, and some insurance companies also eliminate the premium paid in first year.

9. What are the smokers and non-smokers criteria in the term plan?

It includes the smokers or users of any tobacco products, such as chewing tobacco etc. Some smokers who have quit smoking are also eligible for favourable premiums. However the period varies among insurers.

10. What is difference between a participating and non-participating policy?

A participating or profit policy would enable the policyholder to share in the profits of an insurance company which depends on the investment returns of the insurance company. In non-participating policy there is no profit sharing with the insurance company.

11. Will I get a tax benefit on the insurance premium?

Premiums paid for all life insurance policies are exempted from tax up to a maximum of Rs 1 lakh under Section 80C of the Income Tax Act, 1961. The claim amount received by the beneficiaries or bonus in the hands of the policyholder is tax free under Section 10 (10D) of the Income Tax Act.