It is of the utmost importance to have an adequate life insurance cover. It ensures that your family has enough funds to live their life comfortably and meet their financial expenses even after you are not around. An investment in a term insurance plan should be an integral part of your financial planning.
Term plans are gaining popularity among the Indians, especially due to the growing awareness about its benefits of this form of insurance. Today, several insurance companies like ICICI Prudential offer term insurance plans.
Understanding a Term Insurance Plan
A term insurance plan is the purest form of risk cover. A policyholder agrees to pay a fixed amount (premium) for a fixed period (policy term) to the insurance company against a pre-determined life cover amount (sum assured). In an unfortunate event of policyholder’s deathduring the policy term, the entire sum assured is given to the nominee(s). So, essentially, a term insurance plan is a ‘no-frill’ investment instrument. There is no investment component, capital gain or maturity benefit in a term insurance plan. So, if the policyholder survives the policy term, no returns would be given to him.
If you are seeking a complete risk cover without expecting any savings or investment, term insurance is the most ideal for you.
Why a Term Insurance Plan?
Now, you may wonder why you should choose a term insurance plan when there are no returns on investment? Well, here are three good reasons.
- The term insurance is known for ‘low premium-high cover’ benefit. The entire premium goes into covering the risk. As compared to other insurance products, term insurance plans offer a larger coverage at affordable rates.
Let’s take an example. Amit is a healthy male aged 30. He does not consume tobacco. Now, if he wants a pure life cover, all he only has to give is a premium of Rs 6550/- per annum against the life cover of 50 lakhs.
(Source: ICICI Prudential Term Plan Calculator)
- You get the peace of mind. You know that you have secured your family’s future.Let’s say you have taken liabilities such as a home loan. If you have taken a term insurance, the burden of that loan is not passed on to non-working or lesser salary earning members of your family.
- You get tax benefits – the premiums paid on a term insurance plan are deductible from your total income under Section 80C.The claim amount received by the beneficiaries is tax free under Section 10 (10D).
Choosing a Term Insurance Plan
Congratulations! You have decided to invest in a term insurance plan. Now, here are some factors to keep in mind before choosing a term insurance plan.
1. The Life Coverage Amount
You are covering your life through insurance, but are you covering it enough? Being underinsured is as good as being uninsured, therefore, pay special attention to the coverage amount of the term plan. The thumb rule says your life cover should be about 15-20 times your income. However, there are several other elements that go in determining the adequate life cover. For example, your current and expected income / investments/ assets, outstanding and expected liabilities, secondary sources of income (self or other family members) etc, should be taken into consideration.
The stage of your life, such as single, married, recently employed, have spent a few years in employment or nearing retirement and the number of dependents like spouse, kids and elderly members also influence the amount of your life cover.
Here is an example. Sandip, aged 35 years is the sole breadwinner of his family. His dependents include his parents, wife and 2 children aged 7 and 10 years respectively. His annual expenses are around Rs5 lakhs and he has an outstanding home loan of Rs7 lakhs. So, he needs a cover of about 86 lakhs to secure the future of his family.
Also, a cover amount which looks adequate today might not cover your family’s needs tomorrow. So, you also need to take into account the inflation factor at the time of taking a term insurance plan.
2. Policy Duration
A term insurance policy should ideally cover you till retirement. Because, that is the age by when most of your liabilities such as home loan payoff, other outstanding debts as well as expenses related children’s education and marriage would have been taken care of. However, if you expect liabilities or plan to work even after the retirement, then you should choose the policy term accordingly.Since a term life policy is the cheapest form of insurance, ideally you should invest at your youngest age, so that you can choose a 20 or 30 year policy.
Riders are add ons that can be built into your term insurance plan to extend or enhance your life cover. For instance, an ‘accidental death benefit rider’ will pay an additional amount if death occurs in a sudden accident. A ‘family income benefit rider’will give an additional source of income after your death. The availability of riders varies from one insurer to another. However, what is important that you buy a rider only if you feel the need and the one that is the most appropriate for you.
4. Market Reputation of the Insurer
You wouldn’t want to buy a term insurance plan from an insurance company which makes false promises! So, it is advisable to choose an insurer who:
- Has a strong financial creditworthiness rating .
- Is known for its customer service standards.
- Provides the right information to its customers.
- Has a good claim settlement ratio.
- Provides hasslefree and quick settlement.
According to the IRDA Journal June 2015, the claim settlement of ICICI Prudential at 93.8% is one of the best in the list of private insurers.
5. Health Conditions and Medical Test
It is advisable to disclose all your past and existing health conditions to your insurers. Even if you don’t the medical tests conducted by the insurance company will capture that. In case your medical tests reveal any adverse health related facts such as blood pressure, diabetes, drinking or smoking, it may translate into a higher premium. But, at the same time, it will ensure that your policy is not denied or claim is not rejected on account of misleading or non disclosure of health information.
According to RBI rules, it is mandatory for banking, insurance and demat customers to provide Know Your Customer (KYC) documents. Typically, these documents include your identity proof, address proofs and PAN card details. However, you may need to furnish additional documents, depending on the nature of policy you wish to take and the specific requirements of the insurance company,.
7. Questions and Exclusions
It is recommended to ask questions to your insurer regarding the policy commencement date, free look period, surrender policy, policy lapse due to non payment of premium, under what all death circumstances is the claim paid and exclusion clauses.
A term insurance policy is a good as well as an affordable investment for your peace of mind. Hence, you should purchase it as early as possible.