What are the pros and cons of term insurance?

Term insurance offers security for a fixed time period to the insured and their family. For a nominal premium each month, individuals can secure the financial needs of their family for a specified time period. The idea behind the scheme is to have enough monetary support for a family in case of the insured's untimely demise within the term period. The accumulated corpus will help them to continue with their essential expenses like household, rent or education.

Term insurance differs from life insurance. Take a look at the insurance policy’s advantages and disadvantages.

What is term insurance and how does it differ from life insurance?

Term insurance is a financial product that offers a specific amount to the insured for a fixed time period. In this scheme, the policyholders will need to pay a premium in exchange for an assured sum amount. Term insurance is a more affordable option in comparison to life insurance. Life insurance covers the insured and their family in the case of the policyholder’s sudden death throughout their life, provided they keep paying the premiums. Term insurance provides coverage for a chosen period only.

Advantages of term insurance

Cost-effective: Term insurance is more cost-effective when compared to life insurance policies. The premiums are cheaper since the duration of the policy is for a specific term period only.

Coverage in case of critical illness: A primary advantage of term insurance is that you can add critical illness coverage that will help with the expenses for any necessary medical treatment.

Tax benefits: One can get tax exemptions on term insurance plans. While Section 80C of the Income Tax Act allows benefits of up to Rs 1.5 lakh. Apart from this, Section 80D allows an exemption of up to Rs 25,000 if you have opted for riders on critical diseases or health insurance. Under certain conditions, the exemption can go up to Rs 50,000.

Disadvantages of term insurance

No maturity benefit: Unlike life insurance plans, term insurance does not offer maturity benefits to the insured. This means if the policyholder is alive at the end of the scheme's time period, they will not get a lump sum as a bonus.

No wealth creation: As term plans are only meant to provide financial security to the insured's family after his death, there is no chance of any wealth creation in the policy.

Premiums differ: The premiums in term insurance are based on the age of the policyholder and their financial history. If purchased late, investors will need to pay higher premiums for term insurance plans.