Are you wondering is term insurance good investment for 2023? With the global pandemic affecting lives and finances, it's crucial to have a safety net in place to protect your loved ones from any unforeseen circumstances.
Term insurance is a popular type of life insurance that provides coverage for a specific period. It offers financial protection to the beneficiaries in case of the untimely death of the policyholder during the policy term.
While the decision to buy term insurance depends on individual circumstances, you can go through the comprehensive guide below to understand the benefits and drawbacks of term insurance in 2023. Read on to determine if term insurance is a good investment for you.
What Is Term Insurance and How Does It Work?
Term insurance is a type of life insurance providing coverage for a specific period or term. The primary goal of term insurance is to provide financial protection to the policyholder's family in the event of their untimely death during the policy tenure. These plans are pretty easy to understand, making them affordable for many individuals.
Term insurance plans are generally offered for up to 35 years in the UAE. If the insured individual passes away when the policy is active, the beneficiaries will receive a lump sum payment known as the death benefit.
Term insurance policies can be classified into various types, as listed below. You can choose any of them as per your financial requirements and planning.
1. Level Term Plan
A level term plan is a type of term insurance where the sum assured (death benefit) and premium remain constant throughout the policy term. This means that if the policyholder passes away during the term, the beneficiary will receive the same sum assured, irrespective of when the death occurs within the policy term.
Level-term plans are ideal for those who want a simple insurance policy with a fixed cover amount and premium.
2. Increasing Term Insurance Plan
In an increasing term insurance plan, the sum assured (death benefit) increases at a predetermined rate throughout the policy term (usually annually). This plan is designed to counter inflation and ensure the policy's coverage keeps pace with the policyholder's growing financial responsibilities.
It is suitable for individuals who anticipate their financial needs and liabilities to increase over time.
3. Decreasing Term Insurance Plan
In a decreasing-term insurance plan, the sum assured (death benefit) decreases over the policy term at a predetermined rate, usually annually. The premium typically remains constant throughout the term.
This plan is primarily designed for policyholders with financial liabilities that decrease over time, such as mortgages or other loans. As the outstanding loan amount reduces, the need for higher coverage also reduces, making a decreasing term plan suitable.
4. Convertible Term Insurance Plan
A convertible term insurance plan allows the policyholder to convert their term insurance policy into a permanent life insurance policy (such as whole life or universal life) without undergoing a new medical examination.
This feature provides the policyholder flexibility to adapt their coverage as their financial needs evolve. The conversion can be done at specific points in the term or at any time during the policy term, depending on the policy's terms and conditions.
5. Term Return of Premium (TROP) Plan
A term return of premium plan is a type of term insurance that returns the premiums paid by the policyholder if they survive the policy term. In other words, if the policyholder does not pass away during the term, they will receive a refund of the total premiums paid. The premiums for TROP plans are generally higher than those for regular-term insurance plans.
This plan is ideal for individuals who want both life coverage and the opportunity to get their premiums back if they outlive the policy term.
What Makes a Term Insurance Policy a Good Investment?
Term insurance is considered a smart financial decision in 2023 as it offers valuable protection for your family. Mentioned below are the reasons explaining why a term insurance policy is a good investment –
- Substantial Protection at Nominal Rates - Term insurance plans offer substantial life coverage at relatively low premiums compared to other types of life insurance policies. This makes them an affordable way to financially protect your family in case of any unforeseen circumstances.
- Income Replacement - In the event of the policyholder's death, the death benefit received by the beneficiaries can help replace the lost income and maintain the family's financial stability. This is particularly important for families with a single earning member or those with significant financial obligations.
- Maintain Financial Discipline - Paying regular premiums for term insurance encourages financial discipline, as it requires you to set aside a specific amount for your policy on a regular basis, ensuring that you prioritise long-term financial planning.
- Different Policies Providing Flexibility - Term insurance plans come in various types, such as level term, increasing term, decreasing term, convertible term, and term return premium plans. These options allow you to tailor your coverage to your specific needs, providing financial flexibility.
- Inflation Protection - With increasing term insurance plans, you can ensure that the policy's coverage keeps pace with inflation, preserving the purchasing power of the death benefit for your beneficiaries.
- Adaptability To Changing Life Stages - As your life circumstances change (say, marriage, having children, or purchasing a home), you can adjust your term insurance coverage to ensure that it continues to meet your evolving financial needs. For this benefit, you can opt for the increasing term insurance policy.
- Conversion Option - Convertible term insurance plans allow switching to permanent life insurance without undergoing a new medical examination. This feature enables you to adapt your coverage as your financial needs and life circumstances change.
- Personalised Coverage as per Requirements - Term insurance plans often come with additional riders such as critical illness, accidental death, or disability riders. These riders allow you to enhance your coverage and tailor it to your specific needs, providing comprehensive protection for you and your family.
Factors to Consider When Buying Term Insurance In 2023
Once you get the answer to your query 'Is term Insurance Good’, you must keep the following factors in mind while opting for the one –
- Coverage Amount - The first and foremost step is to assess the appropriate coverage amount based on your financial responsibilities, outstanding debts, and the financial requirements of your dependents. You should also consider factors such as your family's living expenses, future education costs for your children, and any other financial obligations if required.
- Term Insurance Policy Tenure - Ideally, you should choose a term length that covers your significant financial responsibilities and extends until your anticipated retirement age or until your dependents become financially independent.
- Affordable Premium - Select a policy with premiums that fit your budget. To get the right policy to complement your budget, you must take into account all financial obligations and liabilities. Remember that term insurance plans offer high coverage at relatively low premiums compared to other life insurance policies.
- Choose Plan Per Needs - As previously mentioned, several types of term insurance plans are available. Before buying one, you must evaluate various term insurance plan types such as level term, increasing term, decreasing term, convertible term, and term return of premium plans, and choose the one that best suits your financial goals and needs.
- Increase the Coverage - You can also consider additional riders like critical illness, accidental death, or disability riders to enhance your coverage and tailor it to your specific requirements.
- Choose Wisely - Choose a reputable insurance provider with a strong financial background, a history of prompt claim settlements, and excellent customer service.
- Read Policy Terms and Conditions - Understand the policy exclusions, which are specific circumstances or conditions under which the policy will not pay a death benefit. Make sure you are comfortable with these exclusions before purchasing the policy. In addition, familiarise yourself with the policy's terms and conditions regarding cancellation and surrender charges. These charges may apply if you decide to cancel your policy before the end of the term.
- Comparison is the Key - Before choosing a policy, you must compare the top plans in the market based on the premium, benefits, and exclusions. You can visit the ‘term insurance’ section on Policybazaar.ae and get the best term insurance plans in the UAE in one place.
Who Should Buy Term Insurance in 2023?
Generally, term insurance is a good financial product for individuals seeking affordable life coverage to protect their families from financial uncertainties. Here are the categories of individuals who can consider buying term insurance in 2023 –
- Term insurance premiums are typically lower for younger individuals, making it an affordable way for young professionals to secure their family's financial future.
- If an individual is a primary breadwinner in their family, term insurance can help secure their family's financial future by providing income replacement in case of their demise.
- If you have dependents, such as a spouse, children, or ageing parents, term insurance can ensure their financial needs are handled without delays.
- If you have a mortgage or other outstanding debts, term insurance can help cover these financial obligations and prevent the burden from falling on your family.
- For specific financial goals, such as funding their children's education or providing for their spouse's retirement, term insurance can ensure the fulfilment of these goals even if the policyholder passes away.
When Should You Buy Term Insurance?
The ideal time to buy term insurance depends on your circumstances and financial goals. However, here are some general guidelines for when you should consider purchasing term insurance in 2023:
- Buying term insurance early in your adult life is advisable, as premiums tend to be lower for younger individuals. Purchasing a policy when you're young and healthy can help you lock in lower premiums for the entire policy term.
- Major life events such as getting married, having a child, or buying a home may increase an individual’s financial responsibilities. This is a good time to consider purchasing or updating their term insurance policy to ensure that their loved ones are protected financially in case of their untimely demise.
- If you take on significant debt, such as a mortgage or a business loan, term insurance can help cover these financial obligations and prevent them from becoming a burden on your family.
Steps to Choose the Best Term Insurance Plan In 2023
Before selecting the term insurance, it is necessary to thoroughly understand your requirements and the available options in the market. Keep the following steps in mind while selecting a term insurance plan –
- The first step is to evaluate your financial goals, dependents, and the coverage that you need to secure your future. As discussed, you must consider factors like outstanding loans, future expenses (like children's education and marriage), and the income required to maintain your family's lifestyle. You can also look for riders or add-ons and enhance the coverage of your base policy.
- The next step is to calculate the sum assured, which is the amount that beneficiaries receive after the policyholder’s death.
- You can also use term insurance premium online calculators or consult a financial advisor to determine the right coverage based on your income, age, liabilities, and family's financial needs. For this purpose, you can connect with insurance experts on Policybazaar.ae and get the required aid.
- Policy term is an essential component when computing the premiums. As per your requirements, choose the policy tenure. To calculate the ideal tenure, you must consider all your financial obligations, anticipated retirement age, and more.
- Once you have all the available plans, you must compare them and choose the one that offers adequate coverage at an affordable price. Remember to select the plan with comprehensive coverage.
- To get a fair idea of the insurance provider's reputation, you must check their claim settlement ratio. This figure indicates the percentage of claims settled by an insurer in a financial year. A higher ratio suggests a better track record of settling claims, which ensures a smoother experience for your beneficiaries.
- Before finalising the plan, read the terms and conditions, inclusions, exclusions, and any waiting periods. This will help you avoid misunderstandings and make an informed decision.
How Much Term Insurance Coverage Do You Need?
As mentioned above, determining the appropriate term insurance coverage depends on your financial situation and the needs of your dependents. To calculate the right amount of coverage, consider factors such as your current income, outstanding debts (like home loans, car loans, or personal loans), future expenses (such as your children's education and marriage), and the funds required to maintain your family's lifestyle in case of unforeseen circumstances.
Additionally, you can also account for inflation and its impact on your family's future financial needs. As a general rule, several experts recommend securing term insurance coverage of 10 to 15 times your annual income.
In conclusion, term insurance is certainly a good investment in 2023 as it provides a safety net for your loved ones in the face of uncertainties. With its affordability, flexibility, and adaptability to evolving financial needs, term insurance serves as an essential component of a comprehensive financial plan.
By carefully assessing your financial goals and requirements, comparing available options, and seeking professional advice when required, you can choose the best term insurance plan that caters to your unique circumstances.
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