Thursday, February 22, 2024

Role of Term Insurance in Personal Debt Management

A loan can be burdensome, especially for a family where the only breadwinner suddenly dies. In such a scenario, the family of the deceased can face a mountain of financial liabilities. But if the deceased had a term insurance policy, its death benefit payout could provide a lot of help for the family that is left behind.

A term insurance policy is a good investment plan, not for wealth creation but to ensure the financial safety of your family. Simply put, it is a safety cushion for your family if they ever face any financial difficulty after your untimely demise.

So, to discuss all these, this article will check the role of term insurance in personal debt management and how it can support securing your family’s financial fate.

Features of Personal Term Insurance?

Term insurance is an essential life insurance plan, but its nature makes it the best. Let us understand its features and relate why it can act as a good option for loan security-

  • It covers the policyholder for a specific period.
  • It doesn’t have any savings or investment component, so it is pretty affordable.
  • It has a large sum assured at low premium rates.
  • In case of untimely death, it supports the family with the financial burden by giving out a lump sum payout.
  • It provides the flexibility of simple renewal if you outlive the policy period.
  • The return of the Premium option is also available with some policies.
  • There are several term insurance tax benefits at different stages

How does it act as a loan security?

  1. Since the term insurance coverage component is specific, with no investment or saving factor, it is affordable. It provides an affordable insurance cushion for goals or debt payments in case of untimely death.
  2. The sum assured is significantly large compared to the premium. So the death benefit payout can cover a large debt in the form of a payout promised.
  3. You can extend it easily with renewal if your loan amount is pending.
  4. There is also a return of premium option, which acts as an add-on. For term insurance with a return of premium, you can check the TATA AIA term insurance plans, as they are some of the reputed names in the market.

Further, term insurance allows you to choose the payout option-

  1. Lump Sum payment in which your nominee will receive the whole amount at once
  2. Money can be paid in small instalments at regular intervals, acting as a replacement for income.

Payout Options to Choose from Based on Loan Type

  • Home Loan

As home loans are usually on the higher side, the lump sum payout option is best.

  • Education Loans

Education loans are EMI based, i.e., a small amount is paid over a period of time. So it would be best if you opt for a monthly payout option. This will help pay off the educational loan while handling regular expenses.

  • Personal Loans

Personal loans usually have a smaller loan amount and a shorter repayment period, as compared to home loans. Therefore, a fixed or increasing monthly income payout should quickly pay it off without much hassle.

  • Vehicle Loan

A car loan is usually bigger than a bike loan. For a bike loan, a monthly payment option is best to spread the debt. As for the car loan, you can choose a regular income with a lump sum based on the loan amount.

Conclusion

Term insurance can play a healthy role in managing your personal debts. It is true that personal term insurance plans do not have any investment component, but if you consider the soft landing it offers against the uncertainties of life, they are huge investment plans.

They help to provide financial security to your family in case of your untimely demise. Further, they can cover significantly large loans if you plan it smartly at a lower premium. But make sure you choose a good plan that offers transparent policies.