Term insurance is a relatively new concept in life insurance. It was introduced to the Indian market as late as 2003 when the sector was opened up to private players. The concept, however, had been in existence in the US for many years. In fact over two to three decades ago there was a movement in the US where the concept of “Buy term, invest the rest” was promulgated. Here is a primer on term insurance relevant to all of us.
What is term insurance?
Term insurance provides coverage for a specific time period. The death benefit is paid only if a person dies during the policy tenure. In that sense these are pure risk covers. Coverage terms and conditions are standardized across insurers. The only exclusion allowed is suicide in the first year of the insurance. You can compare the cost of term plan across insurers and choose the insurer with low costs, provided their claim settlement is over 85%. These settlement ratios are published in the insurer’s public disclosures and the Insurance Regulatory and Development Authority’s annual report.
What are the main things to check when selecting a term insurance policy?
The three most important factors to consider in a term insurance policy are the sum assured paid on death, the premium and the claims settlement ratio.
The quantum of death benefit payable can be increasing, decreasing, or flat over the term of the plan. I prefer the flat sum assured. As a rule of thumb I recommend buying insurance that is 10 times your current annual income. This will ensure that if you die your family will have financial security for several years. If, in the future, you need to increase your insurance you can always buy an additional term cover. Since product benefits are standardized, premium becomes an important criterion. Pick the cheapest plan that meets the claims payment track record.
What are the important riders that can be bought with a basic term life plan?
Common riders available with a term life plan include: accidental death, permanent disability, and critical illness. Critical illness rider with a term plan is recommended. This helps avoid a separate pre-issuance medical check-up for a critical illness plan, and the premium is fixed for the term of the policy. The other two benefits—disability and accidental death—are better bought independently, in an individual accident insurance policy. Individual accident insurance policies have several advantages—no pre-issuance medical tests, fixed premium at any age, and lower rates than rider premiums charged by life insurers.
Are there term plans that come with money-back options?
There are term plans available with a return of premium option. These work as standard endowment plans. In such plans, if there is no claim till the end of the policy term, the entire premium paid is refunded. However, these plans are expensive and do not justify value for money. The effective return in these plans is low, and if the incremental cost of such a plan is deposited in a bank fixed deposit or mutual fund, your return is likely to be higher.
A standard term plan is better than return of premium plans.
How to purchase term insurance-offline or online?
With most insurers there is no price difference whether you buy the product online or offline. If you are certain about the insurance, you want and comfortable handling the paperwork yourself then buy it online. Otherwise work with our financial fitness expert to help you through the main questions – How much sum assured? Which are the lowest premiums? And what are the claim settlement ratios of different term insurances? A good advisor will also step in if a claim needs to be paid. She can help with the paperwork and follow-up with the insurer.
In summary, term insurance is by far the most key life insurance for your portfolio. The sooner you buy this the better.
Author Bio: Mr.Kapil Mehta has over 20 years of experience in insurance, consumer goods, consulting and M&A in India. He is the Co-Founder of SecureNow Insurance Broker Pvt. Ltd, an award-winning insurance broking firm, set-up in 2011. SecureNow was a top three Asian Insurance Broker of 2015, awarded by the Asian Insurance Review.
Kapil is a top 10 writer in the world on Quora for insurance matters. He writes regularly on insurance in the Mint, specifically on matters that effect individual insurances like life and health. Connect with Kapil here.