What Is a Policy Term?

TeamAckoJul 14, 2024

A life insurance policy can help the family members deal with financial consequences if the policyholder dies unexpectedly. Acknowledging the importance of the right insurance policy, policyholders should be careful while selecting their plan. In most cases, the evaluation process requires a close look at three things: premium payment, duration of the policy (also called policy term) and the benefits. Usually, the focus is on the premium and the benefits, but the policyholder also needs to ensure that choosing the right policy term aligns with their financial goals and needs. Read ahead to know more about the policy term in life insurance

Contents

• An Overview of Policy Term
• Factors to Consider While Choosing a Policy Term
• Recommendations for Choosing the Right Policy
• What is a Rider in Life Insurance?
  • How to Choose the Right Insurer?
• Tax Benefits of Insurance Policies
• Difference between policy term and premium paying term
• Frequently Asked Questions

An Overview of Policy Term

The policy term is the maximum period for which the life cover in the insurance policy will remain active. It is usually determined at the time of choosing the policy and purchasing the insurance plan. Normally, companies offer a policy term ranging from five to 40 years.

Factors to Consider While Choosing a Policy Term

Here are some pointers to keep in mind before closing on the right policy term. 

• Financial goals or needs: People have different financial goals and needs. Some prefer Term Insurance, which covers them for specific periods like 10 or 20 years, while others favour whole life insurance plans, providing coverage for their entire life.
  Take the example of Raman, who bought a Term Insurance cover of Rs. 50 lakhs for 35 years. He passed away in the 30th year. In this case, the insurer paid Rs. 50 lakhs to his nominee. In this case, even if the policy term was not complete, the nominee got paid.
  Take the example of Preetha, who had taken an Endowment Plan with a policy term of 20 years and the payout option as a lump sum at the end of the term. If Preetha survives the policy term, she will get the payout after maturity.

• Age of the insured: One of the most important things the policyholder needs to think about is age. Some policies, such as pension savings plans, have a shorter policy term. The best thing about Term Insurance is that policyholders can start whenever they want. But, if they start in their twenties, they can have a policy for up to 40 years and enjoy better benefits.

• Retirement Age: Your expected retirement age influences how long you'll need income protection. If you retire at 65, you might want a policy that lasts until then to ensure you're covered throughout your earning years. This helps provide a financial safety net, maintaining your standard of living and covering potential health-related expenses as you age.

• Financial Liabilities: Evaluate your current and expected future debts. Large debts, such as home mortgages or business loans, require that you have sufficient coverage to ensure that these debts can be settled without burdening others. The term of your policy should at least match the duration of your longest financial obligation.

• Family Structure: Your dependents' needs are crucial in deciding your insurance term. A longer-term is advisable if you have young children or plan to have a family soon, ensuring that financial support is available throughout their growing years until they become financially independent.

• Health Conditions: Personal and family health histories can necessitate a longer policy term. If there are hereditary or chronic health issues, securing a longer-term one ensures that you have coverage when you are older, a time when health issues are more likely to arise, and treatment costs could escalate.

• Investment Goals: Your insurance can also be a financial planning tool. If your goals include funding major future expenses like your children's education or a significant personal project, choosing a policy that matures around these events can ensure you have funds when needed.

• Risk Tolerance: This reflects how much uncertainty you can handle regarding your financial future. Those with a low-risk tolerance prefer a longer policy term for a prolonged sense of security, ensuring unexpected changes do not jeopardise their economic plans.

• Inflation Considerations: Over time, inflation can erode the purchasing power of money. Selecting a term and coverage amount that accounts for future costs rather than just today's expenses ensures that your coverage remains adequate over time, maintaining its intended protective value.

• Availability of Emergency Funds: If you already have a robust emergency fund, you might choose a shorter-term or a less extensive coverage plan. This fund acts as a financial buffer, reducing the need to rely solely on insurance payouts in case of unforeseen events.

• Existing Insurance Coverage: Assessing what coverage you already have is crucial. You may discover that certain areas of your life are already well-protected, allowing you to focus on covering gaps rather than duplicating existing benefits. This strategic approach ensures comprehensive coverage without unnecessary costs.

Recommendations for Choosing the Right Policy

Depending on the type of policy, here are the recommendations for the policy term.

• Guaranteed Savings Plans & Whole Life Insurance with a guaranteed maturity value: Most guaranteed savings plans have a policy term of at least 10 years. So, policyholders should only use the policy for the right kinds of financial goals. Regarding the maximum policy term, guaranteed savings plans with an assured maturity value can last until the person is 99 years old.

• Guaranteed savings plans with an option to get money back: A money-back plan is ideal for those who are looking for a guaranteed return on investments and regular payouts, in addition to insurance coverage for themselves.
  These guaranteed savings plans have a 10-year minimum policy term, while the policyholder can be up to 99 years old to avail of the same. Keep these conditions in mind while choosing the policy term. Remember that the term for cash flow might differ from the policy term. Policyholders should ensure that the policy's cash flows match their financial needs, such as paying for their child's college or saving for retirement.

• Term Insurance: The purest and the most common type of life insurance is term insurance. You pay a fixed premium for a specific year or period, i.e., a policy term, and get a large life coverage in exchange. The policy term could be 10, 20, 25 or more years, based on your needs and goals. If you have financial dependents, term insurance is an excellent choice, shielding their welfare in your absence. Regular Term Insurance, Return of Premium Term Insurance, Increasing Term Insurance, and Decreasing Term Insurance are popular term plans in India. 
  Explore ACKO Life Flexi Term Plan, a pure and unique plan from ACKO with unmatched flexibility. This exclusive plan is packed with useful features and promises to provide your loved ones with a financially stable future with the amount of money you choose for them.
  Here are some key advantages of the ACKO Life Flexi Term Plan:

• Plans for insurance based on units (ULIPs): The minimum policy term is 5 years for ULIP-linked plans, and the maximum is when the insured is 99 years old. With tax-free withdrawals, a ULIP plan can be useful for a long time after retirement. Once the insured person has enough money saved up, they can take out the money in small amounts to build a tax-free pension revenue stream.

• Pension Plans: Pension plans generally have a shorter policy term, with some of the insurance providers offering a term period of up to 12 years, and the industry’s average maximum policy is 10 years. There is a vesting age for pension plans that offer deferred annuities. The vesting age can be anywhere between 40 and 65 years old. For example, if a policyholder wants to start getting their pension at age 60, they have to be at least 50. While different policy terms are suitable for different plans, the general norm is that the benefits get better with longer policy terms.

What is a Rider in Life Insurance?

Insurance riders are additional benefits or coverage options to add to a standard insurance policy. These riders enhance the base policy by providing extra protection against various risks. Common examples of riders include:

• Accidental death benefit riders

• Critical illness riders

• Waiver of premium riders

• Disability income riders

How to Choose the Right Insurer?

When considering the duration of your insurance policy, evaluating the insurer you're entrusting your financial security is also essential. Here are some key considerations to guide you in choosing the right insurer:

1. Check Insurer's Financial Stability: Look at the insurer's solvency ratio and financial health indicators, which ensure the company can fulfil its claim obligations. Reputable agencies like CRISIL and ICRA provide ratings that can help assess this.

2. Claim Settlement Ratio: This ratio indicates the percentage of claims an insurer has settled during a financial year. Higher ratios suggest a more reliable insurer likely to settle claims without hassle.

3. Customer Reviews and Feedback: Read customer reviews on various platforms to gauge the insurer's service quality. Pay attention to feedback regarding the claim process, customer support, and transparency.

4. Range of Products: Choose an insurer that offers a diverse range of insurance products. This variety ensures you can find policies that best match your specific needs, whether term insurance, endowment plans, or ULIPs.

5. Ease of Process: Consider how easy purchasing and managing the policy is. Insurers with digital platforms for managing policies, making premium payments, and filing claims can enhance convenience significantly.

6. Premium and Benefits Comparison: Compare the premiums and benefits offered by different insurers for similar policies. Use online comparison tools to evaluate which policies offer the best value for your investment.

7. Network Hospitals (for Health Insurance): If you're looking for health insurance, check the insurer's network of hospitals. A vast network means easier access to cashless treatment across the country.

8. Transparency: The insurer should have clear policy terms and conditions. Look for companies that provide detailed, understandable policy documents without hidden clauses.

9. Customer Service: Good customer service is crucial, especially when filing a claim. Opt for insurers known for their professional and responsive customer support teams.

10. Accessibility: Consider how accessible the insurance services are, including the availability of local branches, online services, and mobile apps. This can make a significant difference in managing your policy effectively.

Following these guidelines, you can choose an insurer that meets your insurance needs and provides peace of mind through reliable service and financial security.

Tax Benefits of Insurance Policies

Understanding the tax benefits can help you make informed decisions about the duration of your insurance policy, taking into account both the financial planning and tax-saving goals.

In India, insurance policies offer several tax benefits that significantly reduce taxable income and enhance financial planning. 

• Under Section 80C of the Income Tax Act, premiums paid towards life insurance policies are eligible for a tax deduction up to ₹1.5 lakh annually. This deduction applies to policies for yourself, your spouse, and your children.

• Additionally, the proceeds from a life insurance policy, including maturity benefits, are tax-free under Section 10(10D), provided the premium does not exceed 10% of the sum assured for policies issued after April 1, 2012.
  The premium must be at most 20% of the sum assured for policies issued before this date. These tax benefits make life insurance a compelling option for saving tax while securing financial protection for your family.

Difference between policy term and premium paying term

Now that you are aware of the need to choose the right insurance plan with the optimal policy term, it is important to understand the difference between the Policy term and the Premium Paying term. 

• The policy term is the life of the insurance policy, after which the policy matures, and the insured can avail of benefits, if applicable.  

• When people avail of a policy, they also pay an annual premium for a certain number of years to keep the policy afloat. The Premium paying term is the duration until you pay the premiums. 

Sometimes, the policyholder would pay premiums until the end of the policy term, and sometimes, it could be for a shorter duration. For instance, if Shalini, who is 25 years old, takes a Term Insurance plan with a policy term of 40 years, her policy would mature when she turns 65. However, she also availed a premium paying time of 25 years. This means that she would need to pay premiums until she turns 50 and not after that. But, the policy will continue to be active until she turns 65. This is an example of when the premium paying time is less than the policy term.

Frequently Asked Questions

Here are some common questions and answers related to the policy term in life insurance.

What does policy term mean in insurance?

Policy term means the period till which your insurance plan remains active. If applicable, you can avail of the maturity benefits till the end of the policy term.

What is the difference between maximum policy term and policy maximum?

Maximum policy term denotes the maximum term period up to which an insurer offers a policy. Sometimes, it can go up to 40 years. Policy maximum is the maximum amount that the insurance provider will pay for covered services and expenses.

What is policy term vs maturity?

Policy term is the total duration until the policy remains active and the insured person can utilise benefits. Maturity is the time when a policyholder survives the policy term and they can avail benefits.

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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