Life is unpredictable, and one may never know when an unfortunate event may strike. The consequences of such unfortunate events can be very severe for family members, especially if the person was the primary earning member of the family. To mitigate these consequences, at least in the financial aspects, one should take a term insurance policy. The major advantage out of the many term insurance benefits is that the loved ones receive financial compensation when the policyholder passes away.
While the policy offers cash value after the passing away of the life assured, many often wonder if there is a possibility of receiving cash value during the duration of the policy. Let’s find the answer to the same.
What is a term plan and how does it exactly work?
Before we dive into the cash value aspect of a term plan, first let us understand how such plans work. When you buy an offline or online term plan, you are expected to pay premiums on a regular basis. Some plans may accept a lump-sum premium as well. This premium is directed toward building your life cover corpus. Unlike a whole life insurance policy, a term insurance policy is valid only for a particular period. If you survive the maturity of the policy, you may receive maturity benefits depending on the options you have chosen.
Ways in which term insurance provides cash value
Here are a few ways in which you can get cash value with your term insurance policy:
Surrendering your policy during the tenure
If you surrender your offline or online term plan during its tenure, then the insurance company provides you with a lump-sum amount corresponding to the total premium you have paid until now. However, this also means that you lose the policy coverage and the sum assured completely.
Partial withdrawing or surrendering the policy
Some insurers may allow you to partially surrender or make a partial withdrawal on your online term insurance policy. The policyholder may use this amount for important reasons, such as providing for children’s higher education, making a down payment for a loan, and so on.
Making settlements through term insurance policies
If you are in financial jeopardy and wish to make a settlement to get out of it, you can take the help of your term insurance policy. For instance, you can sell your term insurance policy to an individual to whom you owe money. They can then choose to sell it and obtain funds or continue with premium payments to get term insurance benefits.
Using a term insurance policy as collateral
You can also make the most of your term plan by using it as a form of security against a loan you are applying for. Many lenders are willing to accept such forms of collateral. In case the loan remains outstanding when the policyholder passes away, the outstanding amount is deducted from the death benefit payout. Using insurance policies as collateral also impacts the individual’s credit score negatively. So, such decisions should be taken after due consideration.
Making the most of tax deductions
According to Section 80C of the Income Tax Act, a policyholder can obtain tax deductions of up to Rs. 1.5 lakhs on the premium they pay against the premium of their term insurance policy. Additionally, the maturity benefit payout, death benefit payout, and surrender payout are exempted from tax.
How to maximise term insurance cash value?
Now that you understand what a term plan is and the cash value is it provides, let’s see how we can maximise it.
Opt for a substantial life cover
A substantial life cover not only provides a larger financial cushion to your family but also decreases your tax outgo and thus helps you save money in the long run.
Select the ‘return to premium’ feature
This feature allows you to receive your entire premium payment when you outlive the maturity of the policy.
Select the correct tax regime
The old and the new tax regime both have their unique merits and demerits. While the newer tax regime provides reduced income tax rates, the old regime allows for more tax deductions. Therefore, it is essential that you choose the regime that provides you with the most tax benefits.
We hope the information provided here empowers you to obtain the maximum cash value and enjoy excellent term insurance benefits.