Insurance can be incredibly helpful in a family's financially vulnerable moments. It can offer financial protection to family members in the absence of the policyholder and help them lead their lives without having to worry about money.

Life insurance plans have several components that can be chosen according to your unique specifications. One of these is the policy term. Selecting the correct policy term is essential for safeguarding your family's financial stability in the years to come.

To understand what a policy term is, please continue reading.

Definition of Policy Term

Policy term is the length of your insurance policy. In other words, it is the duration for which you are covered under the insurance policy and during which your loved ones receive the sum assured if something were to happen to you.

The duration of the policy is a critical factor as it determines how long your loved ones will be covered. When the policy term ends, the insurance coverage also stops. Hence, it is vital to give some thought to the selection of the policy term.

The policy term determines the policy's active years. It begins immediately after purchasing the plan and ends when the policy matures. All the features, inclusions and exclusions of a life insurance plan come into force when the policy is active and are automatically revoked once the policy matures unless it is renewed.

Significance of Policy Term

The policy term puts a time horizon on the financial stability of your loved ones. It helps you plan for the future and align the insurance plan with your family's financial goals and needs. For instance, if you have a home loan with a 20-year repayment term, it can be helpful to opt for a policy term long enough to cover the loan. This way, in case of an unfortunate event, your family can use the insurance payout to settle the home loan.

The policy term is not limited to the duration of the coverage. It also affects other components of an insurance policy. The term directly impacts the premiums of a plan. If you select a longer term, the premium cost is higher compared to shorter terms. If you select a shorter policy term, you may get a lower premium, but you would also compromise your family's financial security. While some insurance companies offer the option to renew your plan, others may not. In such a case, you would have to buy a new plan, which can lead to a higher premium due to ageing and potential changes in your health status.

There are several misconceptions about the policy term. For instance, people believe a longer term is always better. While is beneficial, it is important to know that everyone's financial needs differ. So, instead of following the crowd, you must choose a term that suits your needs. Another misconception about the policy term is that you should only buy a longer policy term if you are young. This, too, can be wrong. While a longer term is helpful for youngsters, it can also be suitable for older people who may have financial responsibilities towards their loved ones.

Types of Policy Term

Below are the different types of policy terms:

a. Short-Term Policy

Short-term policies are plans with relatively shorter tenures of five to ten years. They are suitable for people who do not have long-term financial obligations, such as expenses associated with children's higher education, marriage and more.

They can be ideal for covering short-term liabilities like loans with similar terms or other expenses.

b. Long-Term Policy

Long-term policies offer long policy terms ranging up to 30 years or the entire life of the insured. These plans are useful to ensure the long-term and, in some cases, lifetime financial security of your loved ones. They can provide financial protection to your spouse, children and even grandchildren.

c. Flexible Policy Term

Flexible policy terms do not have a fixed term and can be altered to suit the needs of the policyholder. These plans can be ideal if you are unsure of your future responsibilities and liabilities, as you can change the term to suit your evolving requirements.

Factors Influencing Policy Term

Below are some factors that may affect the duration of a policy term:

Illustration

Ravi, a 28-year-old male who got married last month, decided to buy a life insurance plan with a term of 30 years. This plan can cover him until the age of 58, roughly around the time he will retire. A long policy term will be adequate to ensure the financial security of his spouse and children.

It can support his spouse in covering their daily needs and contribute to the child's education and other monetary requirements. Additionally, it can be suitable to cover any loan dues Ravi may have in the years to come.

Conclusion

The policy term is a critical component of a life insurance plan, and you must select it carefully. It can impact several aspects, such as the cost of the plan and your family's future financial security.

In case of any doubts, you can consult with an insurance guide and get more clarity on what the policy term in life insurance entails and how you can select a suitable policy term for you and your loved ones.