Payout Terminology in Term Insurance

TeamAckoSept 27, 2024

Term Insurance is a type of life insurance coverage that offers financial protection to the policyholder's family in case of the policyholder’s untimely demise. It provides coverage for a specified period, or term, and pays out a sum assured to the nominee in case the policyholder passes away during this period. Term insurance is one of the most affordable forms of life insurance in India, making it a popular choice among those who want to ensure their family's financial security. In this article, we will discuss the importance of payout terms in Term Insurance and the factors that affect them

Contents

• Understanding Term Insurance payout terminology
  • Death benefit 
  • Nominee
  • Survival benefit
  • Surrender value
  • Free look period
• Factors affecting Term Insurance payouts
  • 1. Policy term
  • 2. Premium amount
  • 3. Age of the policyholder
  • 4. Health of the policyholder 
  • 5. Reason for the death
  • 6. Nominee details 
• Types of Death Benefits in Term Insurance
• Tax Implications of Term Insurance Payouts
• Impact of Policy Riders on Payouts
• Market Trends in Term Insurance
• How Term Insurance payouts are calculated
  • 1. Underwriting process 
  • 2. Medical exams and health screenings
• Strategies to Ensure Your Policy Matches Your Needs
• Frequently Asked Questions 

Understanding Term Insurance payout terminology

Here are some crucial terms to know regarding Term Insurance payout. Please refer to your applicable policy wordings for precise details.

Death benefit 

The death benefit is the primary payout that the nominee receives from the insurer in the event of the policyholder's death during the policy term. This amount is typically chosen by the policyholder at the time of purchasing the policy, and it is paid out as a lump sum to the nominee. The death benefit is tax-free under Section 10(10D) of the Income Tax Act, 1961 as per applicable terms and conditions.

Nominee

Nominee in life insurance is the person who receives the death benefit in case of the policyholder's demise. The policyholder can nominate anyone in their family, such as spouse, parents, children, or any other loved ones as the nominee.

Survival benefit

Some Term Insurance policies offer a Survival Benefit, which is paid out to the policyholder if they survive the policy term. It is important to note that adding Survival Benefit Rider to your term insurance comes at a cost and will increase the premium you have to pay. Some insurance companies also offer Critical Illness Coverage and Terminal Illness Coverage riders along with their term insurance plans.

Surrender value

If the policyholder wishes to surrender the policy before the policy term ends, the insurance company pays out the surrender value, which is a percentage of the premiums paid. The surrender value of a term insurance policy may be calculated based on the premiums paid by the policyholder, the duration of the policy, and other factors as specified in the policy terms and conditions. If the policyholder decides to surrender the policy, the insurance company will typically refund a portion of the premiums paid by the policyholder after deducting any applicable charges and fees.

Free look period

A free look period in Term Insurance is a specified period of time, typically 30 days, during which a policyholder can review and evaluate their term insurance policy. 

During the free look period, the policyholder can carefully review the policy documents and all the terms and conditions, including the coverage amount, premium, exclusions, and other important details. If they find any discrepancies or concerns, they can contact the insurance company and ask for clarification or amendments to the policy.

Suppose the policyholder decides to cancel the policy during the free-look period. In that case, the insurance company will typically refund the premium amount paid.

Factors affecting Term Insurance payouts

The following factors have a direct impact on Term Insurance payouts. Have a look. 

1. Policy term

The policy term is the duration for which the policyholder has taken the term insurance. It determines the time period for which the policy is valid, and the death benefit will be paid out only if the policyholder passes away during this term. 

2. Premium amount

The premium amount is the regular payment made by the policyholder to the insurance company for the term insurance. It is calculated based on various factors such as the age, health, and occupation of the policyholder. The higher the premium amount, the higher the payout in case of the policyholder's death.The regularity of premium payments is also a crucial factor that affects the payout of term insurance. If the policyholder misses any premium payments or fails to pay the premium on time, the policy may lapse, and the nominee may not receive the death benefit. Therefore, it is essential to ensure that the premium payments are made on time, and the policy remains active throughout the policy term.

3. Age of the policyholder

The age of the policyholder is one of the most critical factors that affect the Term Insurance payout. If the policyholder passes away at a young age, the payout will be significantly higher compared to if they pass away at an older age. This is because the policyholder has paid a lesser premium amount and the insurance company has to pay the death benefit for a more extended period.

4. Health of the policyholder 

The health of the policyholder is another critical factor that affects the payout of Term Insurance. If the policyholder has any pre-existing medical conditions or has a risky lifestyle, the premium amount will be higher, and the payout amount will be lower. This is because the insurance company assumes a higher risk in insuring the policyholder and may offer a reduced payout in case of death.

5. Reason for the death

The reason for the death of the policyholder also plays a crucial role in determining the payout amount of the Term Insurance. If the policyholder passes away due to natural causes such as illness or old age, the payout will be made to the nominee. However, if the policyholder passes away due to suicide or any other illegal activity, the insurance company may not make any payout.

6. Nominee details 

The nominee is the person who will receive the death benefit in case of the policyholder's untimely demise. It is essential to ensure that the nominee details are correct and up to date. If the nominee details are not correct, there might be legal complications, and the payout may be delayed.In case of the policyholder's untimely demise, the nominee needs to file a claim with the insurance company to receive the death benefit. The claim filing process can be a complicated and time-consuming process, and any errors or discrepancies in the claim application can delay the payout or even result in the claim being rejected. Therefore, it is essential to ensure that the claim filing process is followed correctly and all the required documents are submitted in a timely and accurate manner.

Types of Death Benefits in Term Insurance

When you choose term insurance, one of the most crucial decisions you'll make is selecting the type of death benefit. The death benefit is the money your insurance company will pay your beneficiaries if you pass away during the policy term. Here's a closer look at the different types of death benefits:

Level Term: This is the simplest and most common type of term insurance. The death benefit remains the same throughout the policy. It’s precise and predictable, making budgeting easier for your family since they know exactly what to expect.

Increasing Term: With this type, the death benefit increases over time, usually at a predetermined rate. This can be particularly useful if you're worried about inflation or rising financial responsibilities in the future. It helps ensure that the money your family receives will have the same purchasing power in the future as it does today.

Decreasing Term: Unlike increasing term, the death benefit decreases over time. This is often chosen by individuals who anticipate their financial obligations—like a mortgage or education loans—decreasing over the years. It's a cost-effective option for those who want to match their insurance coverage closely with their decreasing financial liabilities.

Each type has its place, depending on your financial goals and life stage. Choosing the right one involves considering your current financial situation, future plans, and how your family's needs might change over time.

Tax Implications of Term Insurance Payouts

Term insurance is not only a tool for financial security but also offers significant tax benefits, which can be a complex area but crucial to understand:

Tax-Free Death Benefit: Generally, the death benefit from a term insurance policy is tax-free under Section 10(10D) of the Income Tax Act in India. This means your beneficiaries can receive the full amount without tax deductions, a huge relief during a difficult time.

Premium Deductions: Premiums paid on term insurance can often be deducted from your taxable income under Section 80C up to a certain limit. This reduces your total taxable income and your tax burden while alive.

Estate Taxes: While not a concern for everyone, in some countries, large insurance payouts can become part of your estate and might be subject to estate taxes. Consulting with a tax advisor to understand how your term insurance payout will be treated under your specific national and local tax laws is wise.

Understanding these tax implications can help you plan for your financial future and maximise the benefits your family will receive.

Impact of Policy Riders on Payouts

Policy riders are additional benefits you can add to your term insurance policy to cover specific situations that a standard policy might not cover. These riders increase the utility and adaptability of your insurance but come at an additional cost. Here are a few common riders:

Accidental Death Benefit Rider: This rider provides an additional death benefit on top of the base policy amount if death occurs due to an accident. This is particularly useful for those in high-risk occupations or lifestyles.

Critical Illness Rider: Offers a lump sum payment if the policyholder is diagnosed with one of the critical illnesses specified in the policy. This money can help cover medical expenses, lost income, or any other needs that arise due to illness.

Waiver of Premium Rider: If you become disabled and can no longer pay premiums, this rider ensures that your policy remains in force without further payments from you.

Each rider adds a layer of security but at an additional cost. When choosing riders, consider the scenarios most likely given your health, lifestyle, and family medical history. 

Market Trends in Term Insurance

The term insurance market is dynamic and influenced by broader economic, technological, and demographic trends. Some current trends include:

Lower Premiums: As average life expectancy increases and companies leverage technology to assess risk better, premiums have generally trended downward, making term insurance more affordable for a broader audience.

Customisation: Insurers are offering more customisable policies that can be tailored to specific needs. This includes adjustable terms, a variety of riders, and variable payout structures. 

Explore ACKO Life Flexi Term Plan:

One such term plan known for its flexibility and tailor-made features is the ACKO Life Flexi Term Plan. This Pure, Non-Linked term insurance plan allows you to customise your sum assured and policy term based on your evolving financial requirements. Additionally, it offers valuable add-ons such as ACKO Life Accidental Death Benefit Rider, ACKO Life Accidental Total Permanent Disability Benefit Rider, or ACKO Life Critical Illness Benefit Rider. 

Find the right plan---> 

Online Integration: The process of comparing, buying, and managing term insurance policies is increasingly integrated online, making it more accessible and user-friendly. These trends make term insurance more attractive and accessible, but they require consumers to be informed to make the best choices.

How Term Insurance payouts are calculated

The following points are taken into consideration while calculating Term Insurance payouts. 

1. Underwriting process 

The insurer’s underwriting process is a crucial aspect of the Term Insurance policy, as it determines the premium amount and the eligibility of the policyholder to receive the death benefit. The underwriting process involves assessing the risk involved in insuring the policyholder.During the underwriting process, the insurance company evaluates various factors such as the age, health, occupation, lifestyle, and medical history of the policyholder to determine the premium amount. Based on the underwriting process, the insurance company may decide the death benefit.

2. Medical exams and health screenings

The insurance company conducts these tests to assess the policyholder's health condition and to determine the risk involved in insuring them. Based on the results of the medical tests and health check-ups, the insurance company may adjust the premium amount or the payout amount.

Premium amount: If the policyholder is found to be in good health, the insurance company may offer a lower premium amount, as the risk involved in insuring them is lower. On the other hand, if the policyholder has a pre-existing medical condition or is found to be at a higher risk of developing a medical condition, the insurance company may charge a higher premium amount.

Payout amount: If the policyholder is found to be in good health, the insurance company may offer a higher payout amount, as the risk involved in insuring them is lower. If the policyholder has a pre-existing medical condition or is found to be at a higher risk of developing a medical condition, the insurance company may offer a lower payout amount or may exclude coverage for certain medical conditions.

Strategies to Ensure Your Policy Matches Your Needs

It’s crucial to periodically review and adjust your term insurance to ensure it continues to meet your evolving needs. Here are some strategies to keep your policy aligned with your life circumstances: 

Regular Reviews: Review your policy every few years or after significant life events such as marriage, childbirth, or house buying. This helps ensure your coverage is adequate.

Update Beneficiaries: Keep the list of beneficiaries up to date to avoid legal complications and ensure that the death benefit goes to the intended individuals.

Adjust Coverage: Increase or decrease your coverage based on changes in your financial obligations. For example, reduce coverage once your mortgage is paid off or increase it if you have another child.

As per the IRDAI, policyholders now have the option to adjust (decrease) the sum assured after 3 years, as opposed to the previous restriction of 5 years. 

Frequently Asked Questions 

Here are some common questions and answers related to payout terms in Term Insurance.

What happens if the policyholder survives the policy term? 

If the policyholder survives the policy term, there is no payout made by the insurance company in case of Term Insurance. The policy will expire, and the coverage will end. However, there are some companies that offer survival benefits. 

What happens if the policyholder misses a premium payment? 

If the policyholder misses a premium payment, the policy may lapse or become inactive. In such cases, the insurance company may provide a grace period to pay the premium. If the premium is not paid within the grace period, the policy may be terminated.

How is the Term Insurance payout amount determined? 

From the policyholder’s perspective, the Term Insurance payout amount is determined based on the sum assured chosen by the policyholder at the time of policy purchase. The sum assured is the amount that the insurance company pays to the nominee in case of the policyholder's death during the policy term. From the insurer’s perspective, the underwriting process and the policyholder’s medical test results play a part in determining the payout amount.

What’s the maximum coverage I can get for an Accidental Death Benefit rider?

As per the IRDAI, you can purchase an Accidental Death Benefit Rider with coverage up to three times (3x) the base sum assured of your life insurance policy.

Is the Term Insurance payout amount taxable? 

The Term Insurance payout amount is not taxable under Section 10(10D) of the Income Tax Act, 1961, provided the stipulated terms and conditions are met.

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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