Term Insurance

Is Short Term Life Insurance Worth It?

by SMCIB on Wednesday, 05 April 2023

Is Short Term Life Insurance Worth It?

Sunil, 30, is a government employee living with his spouse and son. Both are financially dependent on him. His son is currently pursuing his UG degree and will be ready to pursue higher education in 3 years. Sunil wishes to send his son to a prestigious university abroad. On the other hand, he also has a home loan of Rs. 10 lakhs that needs to be repaid within the next 5 years. Since these are immediate financial obligations, a term life insurance plan with a short term duration will be appropriate for him.  So, he opts for a term insurance plan with a short duration of 5 years.

A term insurance plan is pure risk cover that offers financial protection to your loved ones when you are not around them. If you have short-term liabilities to settle,

you can go for short term life insurance.

But, is short term life insurance worth it? Let’s discuss!


What Is Short Term Life Insurance?
As mentioned earlier, short term life insurance is a type of term insurance plan that provides coverage for a short period of time. You can choose this option if you have short-term liabilities to meet within a short duration, say 2-5 years. In case of your untimely death, it offers financial protection to your loved ones by providing them with a fixed sum of money. All you need to do is pay your premiums on time to keep the policy active.

However, if you survive the policy duration, you won’t receive any benefits.
 

Benefits Of Short Term Life Insurance
Short term life insurance has several advantages, like -

1️⃣ It is simple and efficient
A short term life insurance plan is a straightforward product to protect the financial future of your loved ones. All you need to do is pay your premiums duly to keep the policy active. In return, you receive coverage from your insurer. In case of your demise during the policy term, your nominee will receive the policy’s cover amount as the death benefit.

2️⃣ It is easier on the pockets
Short term life insurance plans are cheap compared to long term life insurance plans. So, if you want a pocket-friendly option to get coverage for a specific time period, a short term life insurance plan can be an appropriate choice for you. These plans usually have low and affordable premiums.

3️⃣ It helps settle immediate financial responsibilities
You can opt for a short term life insurance plan if you have immediate financial liabilities such as debt repayment, funding higher education, weddings, etc. to be settled in a few years. It provides a sum of money to your family should anything unfortunate happen to you. With the money, they can continue to lead a comfortable life.

By investing in a short term life insurance plan, you can be sure that you are providing your family with the financial support to continue to achieve their goals, no matter what the future holds.

For instance, Aakash has a home loan to repay within the next 5 years. He does not want the burden of repayment to fall on his loved ones. So he buys a short term life insurance plan of Rs. 30 lakhs with a policy period of 5 years. In case of his sudden demise during the policy period, his insurer will pay the sum assured of Rs. 30 lakhs to his loved ones as a death benefit which will help them repay the outstanding loan and cover their financial needs.

4️⃣ It offers tax benefits

Under the Income Tax Act of India, 1961, tax benefits can be availed for both the premiums paid and the claim amount received for short-term life insurance plans.

?Section 80C of the Income Tax Act of India, 1961 states that you can avail of tax deductions up to Rs. 1,50,000 for the short-term insurance premiums you pay every year.

?Section 10(10D) of the Income Tax Act of India, 1961 states that the claim amount that your family will receive in case of your untimely demise is exempt from taxation.
 

Is Short Term Life Insurance Worth It?
In order to determine whether short-term life insurance is worth your money, it is important to consider your specific situation and your family’s needs. You can consider buying it if you are someone who wants temporary coverage to meet specific financial obligations. For instance, say your child will be ready for their higher education or wedding within the next few years. In such cases, a short term life insurance plan is a suitable option that will make sure all these immediate goals will be met smoothly whether or not you’re around.

You may even have certain debts such as a home loan or car loan that need to be paid off in a few years. And, should you pass away unfortunately before repaying the same, the entire debt burden will fall on your family's shoulders. The consequences of such a situation could be devastating, leaving your family with a large financial burden that they may not be able to manage. With short term life insurance, you can be assured that your debts will be paid off with the cover amount, ensuring that your family isn't left with any financial worries.

However, if you have financial dependents who you think will rely on you financially for a longer period of time or have long term financial goals, a short term life insurance may not be the appropriate option. You should opt for term insurance with a longer policy duration to better accommodate such goals and needs.

Now, let’s look at 2 case scenarios to understand this better -

Case 1: Suhana is a single working mother. She has a daughter who is financially dependent on her. She wants to send her daughter abroad for her higher education in the next 3 years, after which, her daughter plans to work full-time and will no longer be financially dependent on Suhana.

Solution - In this case, she can go for a short term life insurance plan with a policy duration of 3 years to secure her daughter's future. In case Suhana passes away during the policy period, her daughter will receive a death benefit from the insurance company that can be used to cover her higher education expenses.

Case 2: Deepak, a 35-year-old single father, lives with his 5-year-old son. He wants to save enough funds to cover his son’s higher education and marriage.

Solution - Since these liabilities are to be settled in the next 15-20 years, a short term life insurance plan may not be the appropriate plan for him. In this case, he should purchase term insurance with a longer policy duration, say around 20 years.
 

Conclusion
A short term life insurance is appropriate for you if you want temporary coverage at an affordable rate. On the other hand, if you have greater financial responsibilities to be settled in the long term, you should buy a plan with a longer duration. Before you go ahead and invest in any plan, ensure you do thorough research and evaluate your and your family’s needs.

 

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