Term Insurance is the pure life insurance in which the insurer provides the full sum assured in case of death of the policyholder before the maturity ends. If the insured lives beyond the period stated in the policy, no payment is to be made by the insurer. So, we must know how to choose which Term Insurance is Best?
WHEN TO BUY THE TERM PLAN?
As early as possible, but ask these two questions whenever buying term insurance i.e., are you an earning member and have dependents? If both answers are YES, buy it.
And if you’re an earning member but don’t have dependents (except you are just married or have recently become a parent), then don’t buy it.
If you become financially free once you don’t have any dependents and have created enough wealth to support all your family’s needs – and then, you do not need a term insurance policy anymore.
TILL WHICH AGE TO COVER THE INSURANCE?
Suppose you’re 30 years old and recently got married, you have many options to choose. Choose a pure term plan up to 65-75 years of age because till you turn 60, your children become financially independent & you don’t have dependents.
Also, the term plan should only cover until you are working and earning years. If beyond it, the premium will be higher. The longer you stretch your term insurance cover, the more you’ll be paying through annual premiums throughout the policy term.
It is found that stretching the length of your term policy up to 65 by another 10 years, costs you about 30% extra in annual premiums today. Extending the term by 15 years (to age 80) or 20 years (to age 85) costs you 46-47% extra in premiums.
HOW MUCH COVER AMOUNT TO BE TAKEN IN A TERM PLAN?
Ideally, take a minimum of 10-15 times your annual income. Also, coverage to be chosen as one’s individual profile, whichever amount he/she is comfortable with it. Keep in mind, every penny of life cover is important.
WHICH PARAMETER TO CHECK WHILE BUYING THE TERM PLAN?
Following are the points to be taken considered while taking the right term insurance:-
- Claim Settlement Ratio – The claim settlement ratio of an insurer is the no. of claims settled against the no. of claims filed by the policyholders. The higher the ratio, the better it is. Also, check the claim booked by the insured & claim paid by the insurer. AND their amounts too.
- Claim Repudiated Ratio – It tells about how much claim has been booked by the policyholder, but rejected by the insurance company. Ideally, it should be less than 1.
- Solvency Ratio – It is the measure of the risk an insurer faces of claims that it cannot absorb. It also shows whether a company’s cash flow suffices to meet its short- and long-term liabilities. If there is a natural calamity in India, the insurer has the right to reject the claim by knowing the fact that the policyholder is eligible to get a claim. Ideally, it should be 1.5 or more than it.
- Asset Under Management – It tells about how much money the insurance company manages. Higher, the better. It is used as a parameter because the insurer can provide as many claims in case any natural calamity happened in the country.
Following is the file where you can access the data of different insurers & compare them with the above-mentioned points:
Disclaimer – I haven’t made the excel and also don’t know from where, I have downloaded it. Kudos to that person who made it 🙂
WHICH RIDER TO BUY OR CHECK WHILE TAKING A TERM INSURANCE?
Riders mean the additional benefits given by the insurer that give extra benefit to the policyholder with the extra cost of a premium such as critical illness, accidental death benefit, etc.
Accidental Death Benefit Rider: Accidental Death Benefit rider pays an additional sum to the nominee in case the insured dies in an accident. The rider is cheap to buy and usually provides a cover equivalent to the sum assured under the term plan.
Unpopular Fact – You should know that the payout is made only if death occurs within a specific number of days after the accident (120-180 days) and not after that. Claims can be rejected if the accident is due to self-injury or occurs under the influence of drugs or alcohol.
Accident Disability Benefit Rider: This rider compensates you for inability to work or earn an income if an accident results in a permanent disability. Most insurers make monthly payments and the payouts are specified as a percentage of the sum assured (1% or 2% a month).
Disability riders carry the same conditions and exclusions like the claim becomes payable only for disabilities that occur within 180 days of an accident. So, always check the list of disabilities which are covered, while the rest are excluded.
Also, check whether the policy offers fracture compensation where the insurer pays weekly allowance to the insured. Generally, many riders don’t offer this option. So, check this option too while buying the term plan.
Critical Illness Rider: A critical illness rider pays a lump sum money to the policyholder when he/she is diagnosed with disease mentioned in the policy. In some plans, the insurer pays only a portion of the sum assured.
This rider comes with certain restrictions like the lump sum amount is payable only if the policyholder survives of 30 days past the diagnosis of a critical illness.
So, it is important to look a little deeper into this rider and also check the list of diseases that are offered by the insurer. Also, check the age limit i.e., until which age this cover applies.
Overall, while riders do offer some benefits, if insured want to keep the cost of the term plan to a minimum, then the benefits offered by these riders can be obtained from standalone (independently) policies from general or health insurers when are more affordable.
WHICH PREMIUM PAYMENT OPTION IS BEST FOR POLICYHOLDERS?
Term Insurance usually requires you to pay premiums every year until the end of the policy term. However, there are alternative ways to pay off the premiums in shorter and faster installments like:
Limited Pay: It means the insured has to pay the double premium for every month for say 10 years and after that, the insurer doesn’t have to pay the premium. It is suitable for those who are self-employed or in a job with limited security.
Return of Premium: It means the insurer has to pay back all the premiums you’ve incurred on a term plan if the insured survives the policy term. Also, these plans are marketed as “no-cost” or “free” term plans, but the premiums are expensive, like 2-3 times of limited pay.
Regular Pay: It means the insured has to pay the same premium as mentioned in the policy until the specified number of years. In this case, the premium will be lower as compared to the above-mentioned options. Also, annual premiums are usually cheaper than monthly premiums.
For Example, You are 30 years old and want to be covered until 75 years of age, then the policyholder has to pay premiums for the next 45 years.
WHICH PAYOUT OPTION IS BEST?
A payout is a sum of money paid to a policyholder when a claim is accepted or when the policyholder dies, the nominee gets the money. Following are the options which are offered by an insurance company:
Lump Sum: As the name suggests, the full sum assured is paid to the nominee at one go. This option would work well if the nominee can carefully manage the money and be able to give better returns than the other options.
If not, then go for other options because the primary purpose of buying the insurance will get defeated as the nominee ends up reducing the value of the money received in lump sum.
Monthly Income Option: It means that the sum assured is to be paid in equal monthly installments over your chosen period. For example, a term plan of Rs. 50 lakh with a monthly income payout option may pay around ₹40,000 to 50,000 every month for the next 10 years.
This option is suitable for those who want to provide for the living expenses of their financial dependents post the death of the policyholder, without leaving the job of managing the money to the nominee.
Increasing Monthly Income: It is like the monthly income option, except that the monthly payouts increase every year at a pre-determined rate mentioned in the policy document.
For example, the payout may be ₹40,000 per month in the first year, which increases by 10 percent to around ₹44,000 per month in the second year and further to ₹48,400 in the third, and so on.
This makes a lot of sense as the living expenses keep increasing with inflation over a period of time. But note that this is also the costliest payout option, since the premiums you have to pay are the highest here.
Lump-Sum + Monthly Income: This is a combination of both options. Here, the nominee would receive a specified portion, say 10%, of the sum assured as a lump sum immediately upon the death of the insured & the balance amount is paid in equal or increasing monthly payouts.
For example, a 30-year policy with ₹50 lakh cover may pay ₹5 lakh (10 percent) as a lump sum immediately upon death and ₹40,000 to 50,000 every month for the next 10 years.
In my opinion, one should take Lump Sum + Monthly Income as a payout option if the nominee is not financially well-versed. AND if nominees know about finance very well, the lump-sum is the best option. To better understand, following is the chart of different payout option:
Taxation in Term Plan:
Premiums paid towards term plans and riders (if chosen) are eligible for deduction under Section 80C and 80D of Income Tax Act, 1961. Policyholders can claim a deduction up to ₹1.5 lakh a financial year for the premium paid.
WHY DOES THE INSURANCE COMPANY REJECT THE CLAIMS?
Following are the reasons as why the claim get rejected:
- Hiding some vital information like hiding drinking and smoking habits. If you do these habits occasionally, please state in the policy. If you hide them and are found in the future, there are high chances that the claim will get rejected.
- Hiding medical history is negligence – Make full disclosure of any existing and previous medical conditions. If any material fact is not disclosed, the insurer has the right to reject the claim.
- Also, the policyholder doesn’t want to pay the medical expenses rather the insurance company has to pay. If a policyholder, having critical illness earlier like cancer, heart disease, etc. then, the policyholder cannot buy the term insurance.
- Wrong age recorded in term document – Sometimes, the policyholder gives the wrong age in the document because to get the benefit of cheap premiums. But, in the future, if the policyholder dies, and the insurer gets to know, the chances of not getting the insurance will be higher.
Free Look Period – It means when the insured buys a life insurance policy, the insurer provides a period of 15-30 days, where the policyholder can cancel the policy (stating the reason).
Also, the amount paid for the premium will get back to the insured. But certain charges will get deducted like medical tests, stamp duty charges, etc.
Honest Advice – After taking the policy, you should set the reminder for premium payment or avail the facility of auto-debit from your savings a/c. If a policyholder fails to pay the premium on time, generally insurers provide a 15-30 days grace period to continue the policy.
If the policyholder fails to pay the premium within the grace period, the policy may get lapse.
Unpopular Fact – For instance, if you are a salaried person with a home/personal loan or the owner of a business has accumulated debts, your creditors will be the first claim on your policy to get the amount in case of death of a policyholder.
But, according to the Married Women’s Property (MWP) Act, 1874 enables a married man to protect an insurance policy only for the benefit of his wife and/or children.
In case of a death claim, the nominee i.e., wife and/or children will be the only ones who will have the access to the claim amount, not the creditors. If married and male, opt for the Married Women’s Property Act while you buy the term policy.
Read the offered documents and ask the agent what is covered in the policy and what is not covered. Ending up with a quote – Fun is like life insurance; the older you get, the more it costs.
~ Kin Hubbard
This post is written by Shubham Aggarwal. FOLLOW SHUBHAM AGGARWAL ON TWITTER: @ShubhamAggarwl
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