A term plan is an essential component for those who wish to provide financial security to their loved ones after their passing. Compared to alternative methods of leaving financial support to beneficiaries, term plans are advantageous due to their swift claims process, which avoids the complexities associated with lengthy legal procedures, such as obtaining death certificates and other formalities. Furthermore, term plans offer a higher assured sum in comparison to the invested premium. Nevertheless, some individuals mistakenly perceive them as lacking a savings component. In this article, we will explore the reasons behind this misconception and the genuine savings features embedded within a term plan.
Why Term Plans Are Often Misunderstood as Investments Without Savings Provisions
A term plan represents the most fundamental form of life insurance, characterized by relatively low premiums. Consequently, one should not anticipate an extensive array of supplementary features from such a plan. The absence of these extra features is what tends to diminish its appeal as a savings plan. Below are key factors contributing to the misconception that term plans are devoid of savings potential:
Absence of a Money-Back Policy
Unlike traditional life insurance policies, term insurance does not include a money-back policy. Therefore, policyholders do not receive a refund of the premiums paid at the end of the term. This leads many to believe that their investment in the plan is unproductive, particularly when the policyholder survives the term. Moreover, the absence of a money-back policy precludes discussions about interest rates or investment returns.
Lack of Intermittent Payouts
Many insurance policies offer intermittent payouts based on the policy's purpose and type. For instance, child plans feature payouts at significant milestones in a child's life. However, term insurance does not provide such periodic payments or benefits throughout the term.
No Loan or Partial Withdrawal Option
In certain circumstances, policyholders may make partial withdrawals from their insurance policies in case of emergencies or use the policy as collateral for obtaining loans. Unfortunately, term insurance does not allow for such withdrawals or loans.
Limited Rider Options
Term insurance typically offers only two riders, both of which are related to accidents. This means that important riders like critical illness coverage cannot be added to your term insurance plan.
Absence of Surrender Value
Term plans do not have a surrender value. This implies that if you decide to surrender the policy beyond the agreed-upon limit, you will not receive any of your invested funds.
Tax Savings
While the factors mentioned above might create the impression of a term plan devoid of savings potential, there is, in fact, a savings aspect to consider—tax savings. According to Section 80C of the Indian Income Tax Act, 1961, you can claim a tax deduction of up to INR 1,50,000 on premium payments made in a given year, reducing your taxable income. This deduction is applicable once a year and is subject to potential changes in tax laws.
When you factor in these tax savings over the years of investing in a term plan, you can accumulate substantial savings. Instead of paying these sums as income tax, you can allocate them to other personal or family needs. This legal and publicly endorsed tax reduction method is uniquely accessible through insurance plans.
In Conclusion
Now, you have gained a clearer understanding of the savings aspect of term insurance. This knowledge will enable you to make informed decisions when selecting a term plan over a traditional savings plan. To maximize the savings potential of a term plan, it is advisable to invest in plans offered by reputable insurance companies.