Term Insurance is the simplest and least expensive type of insurance. It pays benefits only upon the policy holder's death. Age is very important factor in determining the premium of a term policy. For example; with Annual Renewable Term Insurance, the policy holder pays a low premium in the beginning, which increases annually as he or she gets older.
Term Insurance typically suitable for younger people with children and limited funds who are not covered through an employer. This type of policy helps such a person's heirs to cover all the expenses such as mortgage and college costs, estate taxes, and funeral expenses on his or her death. It is a pure risk cover for a particular period of time. This means that the sum assured is payable only if the policyholder dies within the policy term.
For example, if a person buys a policy of Rs. 2,00,000 for 15 years, his family is entitled to the money if he dies within that 15-year period. If he survives the 15-year period, he is not entitled to any payment; the insurance company keeps the whole premium paid during the 15-year period. So, these policies are not meant for savings or investment. It is a 100 per cent risk cover. It purely means that a person pays a certain premium to protect his family against his sudden death. He sacrifices the amount if he lives longer than the period of the policy. But it is a very effective way of covering your life with a cheaper premium.
See Also: Best Term Insurance Plans In India
1. Always select Guaranteed Renewable Policy
You should always prefer a guaranteed renewable policy, so that your coverage cannot be terminated if you have any kind of health problems in future. If you are purchasing a guaranteed renewable policy company has the responsibility to renew the policy after the predetermined term even if you are suffering from some health problems.
2. Choose only convertible Policy
It is very important to remember that while choosing the term insurance you should make sure that the policies are convertible, so that you can switch to other plans later if needed. If you do not prefer the convertible policy, till the end of the policy term you should have to continue with the same Term plan, you won’t be having the option to switch to another plan.
See Also: Term Insurance for Home Loan
There are different types of term insurance you can choose from. It can be classified into the following categories:
1. Level Term
In level term insurance, the premium amount is set for a definite number of years, and then it increases at the end of each time period. In this type of term insurance everything will be charged at a consistent level right from the premium to the period for which it is payable.
2. Increasing and Decreasing Term Insurance
In this type of policy you have the option of changing the policy amount. You can either choose to increase the amount or to decrease it. However in any case the insurance premiums remain consistent over the whole term.
3. Renewable Term
In Renewable Term if an insured does not die during the term for which the insurance is taken he has the alternative to renew it after that period. It needs to be understood that you will be required to pay a higher amount of premiums on such renewals. Even after the renewals the insurance amount will be paid to the dependents of the insured after his death.
4. Convertible Term Insurance
In this kind of policies you have the option of converting the term insurance into other policies. This will be helping you to make use of the time advantages of these types of insurance and thereby get free of the limitations by converting it into a suitable and preferred policy.
5. Group Term Insurance
The term group insurance is not only applicable to term insurance but to other forms also. Group insurance is usually taken by an employer. The premiums are collected from the monthly salary of the employee and deposited in the insurance company. However unlike in other insurance group term insurance is taken only for specific periods; the premiums will still be lower.
Following are the advantages that you can receive from a Term Insurance Policy:
1. Helps to Settle Loans
Loans are generally repayable over a period of years. When you take a loan for car or house or other movable and immovable properties you are under the responsibility to repay it over a period of time. During such circumstances you can take a term loan in order to ensure that your dependents have sufficient cash to repay them in the event of your unexpected death in that period.
2. Flexible Duration
This is the only type of life insurance policy whereby you can insure your life for a period of small duration like one year. This type of facilities will help you to properly plan and assign the sum required to make the payments. In the absence of such flexibility you will be enforced to oblige with the time limits set by the company for the respective policy.
3. Less expensive
Even though term insurance premiums increase over a period of time they are still considered inexpensive when compared with other kinds of policy. Cheap term insurance does not mean that the consumer will lose quality or benefits. This can help you even to save money in the initial stages which you normally pay in other policies. On the contrary when the premiums are increased you will be able to make use of the cash mounted up to pay the remaining premiums. In the meantime, the earlier deposits would have earned interest as well. Therefore the customer will be able to obtain cheap life insurance quotes.
4. Suitable for Satisfying Particular Requirements
Term insurance is not only useful for settling loans but also for other particular requirements. Suppose you want to build a house or fund your child's education in an expensive university you can place targets and invest in a term insurance for that particular period. This will help you to meet critical events which would have otherwise been very difficult.
The primary objective of life insurance is to provide financial protection for your family in case of policy holder’s death. It helps you to ensure that your family and loved ones will have sufficient money to fulfill their needs in your absence also.
Term Insurance plan is the pure form of life insurance or in other words we can tell that it is a pure risk cover plan in which the insured pays a lower premium for a higher sum assured. Term insurance is the cheapest among other forms of life insurance; it helps the policy holder to insure himself for a larger amount at a relatively low premium. As we mentioned earlier insurance is not a place to park your investments, the ultimate objective of insurance is to provide financial assistance to your family in your absence. Term plan helps you to cover your life with a very less premium, so that you can invest the major part of your savings in some other productive investments. If a person is return sensitive investor or he is looking for returns from his investments, term plans are not suitable for them. Most of the term plans doesn’t give any returns if nothing happens to the life insured. There are some plans it return the premiums paid if the individual survives the tenure.
Term plans are cheaper than other kinds of insurance because of their lean cost structure. In term plan’s premium only administration expenses and the mortality charges are covered. There is no savings element in the premium charged to the insured. As a result of this, if the insured were to survive the term of the plan, he gets no returns. In fact the premiums paid towards this plan are entirely written off if no eventuality occurs during the tenure of the plan. Only in case of an eventuality your nominee will receive the sum assured. At the same time if you are considering insurance as an investment you have to go with Endowment plans or ULIPs. But here the charges will be very high because these plans will impose allocation charge, fund management charge, etc. apart from the mortality charges and administration charges.
In life insurance terminology, endowment plans are referred to as ‘with-profits plans’. They cover the individual’s life in case of an eventuality; if he survives the term he receives the maturity amount. In the happening of the individual’s demise, his nominees receive the sum assured with accumulated profits/bonuses on investments. In case the individual survives the tenure, he receives the sum assured and accumulated profits/bonuses.
As a whole life Insurance is a powerful tool to cover your unforeseen risks that can affect your family in your absence. It also works as a saving instrument which can help you in planning for your children’s education, daughter’s marriage, pension, retirement benefits or for any other defined objectives. Factors you should consider before buying term insurance are:
Single Premium Term policies are those there you have to pay the premium in a lump sum amount. The policy will cover your life for a predefined term. This plan helps you to escape from the burden of paying the premium every year. Pay the premium once and forget, it will give you cover for a predefined term. Compared to regular premium plans the premium will be high in this plan because you are paying money only once where as in regular premium plan you will be paying the premium every year.
Regular-Premium Term Plans offers you the option to pay the premium on a yearly basis. If you don't want to make a huge one-time payment, go for this option. You will have to pay the premium every year till the end of the insurance term.
Normally in Term plans, if the policy holder survives the policy term nothing will be returned to him. You will lose all the money that you have paid. But in this plan you get back all the premiums you paid. It could be with or without interest. Biggest advantage of this plan is if you survive the maturity, no money is lost. But you have to pay a heavy premium every year, it will be much more than the regular premium policies.
This policy is meant for the people those who have taken home loans. The insurance amount will be equivalent to the outstanding loan amount. It gradually decreases, in the same proportion, as the loan amount is paid back. The premium here works just like the Equated Monthly Installment (EMI) of the home loan. It stays constant through the repayment period. This kind of policies assures the insured that, in an eventuality like death, his/her family will not be burdened with the repayment of heavy debt.
Some of the disadvantages of term life insurance are as follows:
Term insurance policies require the insured to pay a lower amount in the beginning; as a person gets older he needs to pay a higher amount of premium. This will show to be a difficult task if the person is not able to allocate funds regularly. In addition the insured may have more commitments and some of them might be unexpected. Therefore the concept of cheap term life insurance seems to be a myth when a person is not able to meet the policy demands at this stage.
In a Term Plan the insured may not be able to enjoy permanent protection like a permanent life insurance policy. The insurance policy covers risks of death only during the specific term. This places the insured in a disadvantage because if he is not able to renew the policy and pay higher premiums he will lose the protection thereafter. The insurance company will not refund the money if the insurer does not die in that particular period.
This type of insurance is observed to be the best especially when it is not possible to allocate a huge sum but at the same time the customer is badly in need of insurance. There is no precise time for term insurance; it can be for a period of 1, 5, 10 or 15 and even 30 years. The insured has to choose that particular time which is convenient for him.
Following are the points that you should keep in mind while selecting a Term Plan.
So What is a Term Insurance Policy?
You must be knowing that a term insurance policy is a pure protection policy or a mortality cover without any investment exposure. This policy provides protection for a fixed tenure by giving the sum assured in case of the death of the policy holder on the payment of a premium. This kind of insurance has a fixed time frame which might be 10, 20 or even 30 years and premiums are calculated depending on the age of the policyholder and sum assured. This policy can be got for as less as INR 25 per day and can provide you a protection cover for your family in case of your early demise for as high as INR 40 Lakhs sum assured especially for a young healthy 30 Year old individual. This kind of a policy is recommended mainly for young working individuals who are at the crossroads or just starting their families and do not have much wealth owing to their young age. This kind of insurance provides your family a wealth supplement in case you die young. However the premiums are not returned and are foregone if you survive the term period of the policy. Mainly term policies have a built-in feature to convert them into a Whole life policy or a Permanent life insurance policy regardless of a change in the position of your health.
See Also: Best Term Insurance Plans In India
So What is an Endowment Policy?
You must be knowing that one of the main reasons why people are not so keen on taking up a term insurance plan is the lack of a survival benefit in this plan. You survive a term plan you get nothing. This prompted the Insurance Companies to come up with a new kind of policy called the Endowment policy. This plan incorporates both a savings component and a protection element. In case of your unfortunate demise the sum assured as well as the accumulated bonus is paid to your nominee. In case you survive the tenure of the policy the sum assured as well as the accumulated bonus is paid to you .This kind of policy has a higher premium than the term insurance policy as there is a savings component .You must be knowing of a special plan called the Unit Endowment Plan. Here part of your premium paid is allocated towards the insurance component and the rest in invested in the units of the Unit Linked Endowment Policy depending upon the Net Asset Value of the policy.
These units invest in money market instruments, Government Bonds and Equity Shares in the requisite percentages as specified by you and also taking note of the premium. The profit obtained due to appreciation of these units is used to pay your bonus. The age of entry in these kind of policies is around 7 years with the maximum permissible age allowed to enter this policy being 60 Years. These could be Single premium or Regular Premium based Endowment policies. The premiums range from INR 20000-100000 per annum for these policies depending on the age as well as Sum Assured of the policyholder. The maximum sum assured can be 25-30 times the annualised premium for age of entry up to 45 Years. These policies also incorporate a Critical Illness Rider where the policy pays out the sum assured as well as the bonus amounts when the policyholder suffers from a serious ailment. An extra premium might be charged for the Critical Illness Rider.
You must be knowing that under this kind of a policy part of the premium paid goes towards the insurance cover and the rest of the amount is invested in shares, real estate or government bonds. The insurance component depends upon your age, gender or the time period of the Endowment policy. The profits of this policy depend upon the value of shares and the other investments. The profits of the whole pool minus the costs of running this policy are given to you as a bonus. These policies guarantee to pay you a certain amount. You will incur high surrender charges and penalties if you surrender this policy early.
See Also: Endowment Life Plans
Why Is Term Life Better Than An Endowment Policy?
Mr Sandeep a male of 28 years of age invests in an Endowment policy with a 30 year tenure paying a premium of INR 30000 per annum. The sum assured is INR 10 Lakhs per annum in case he dies before the tenure of the policy. The policy yields a sum assured as well as a bonus amount of INR 25 Lakhs after a period of 30 Years. Let us calculate the rate of return of this policy over a time frame of 30 Years.
Tenure: 30 Years
Yearly Premium: INR 30,000 Per Annum
Sum Assured : INR 10 Lakhs
Maturity amount : INR 25 Lakhs
Let us use the Annuity Formula to calculate the return on investment.
Future Value = Present Value * [(1+r) ^ n – 1.0] / r] * (1+r)
2500000 = (1+0.050) ^30-1)/0.050)*(1+0.050)
The L.H.S and R .H.S are almost equal.
Therefore r= 5.0%
The value of r which satisfies both the equations is 5 %.This means that return on investment made from an Endowment Policy is just 5.0% which is too low. The reason why an investment in the Endowment policy is preferred by people is because of the insurance cover provided by this policy. However this amount is very less and cannot provide sufficient coverage or financial protection to the dependents of the policy holder. If Mr Sandeep survives for the tenure of his Endowment policy he will get a sum assured of 10 Lakhs and maturity benefits of INR 25 Lakh, basically a return of 5%.Thus at the end of 30 Years or when Mr Sandeep is 58 Years of age he gets an amount of INR 35 Lakhs Consequently if he doesn’t survive the term of the policy returns are subsequently lesser than 35 Lakhs.
Let us consider a conservative investor Mr Ramesh who is 28 years of age has taken up a term insurance policy mainly for mortality cover as well as protection cover. He also has a corpus of INR 30000 for investment. His premiums are INR 7500 per annum for a Sum Assured of INR 35 Lakhs in his level term insurance policy. The time period for this level term insurance policy is 30 years. If he survives the full tenure of the term insurance policy he would not get the sum assured as this policy provides zero survival benefits. He invests the remaining sum of INR 22500 per annum in a debt instrument mainly a Public Provident Fund which gives a rate of return of 8.7% Compounded Annually. This translates to a net return after 30 Years of INR 31.5 Lakhs. If he survives the tenure of the term policy he will get INR 31.5 Lakhs .However if he were to die at the age of 43 Years he would get the sum assured of INR 35 Lakhs of his term insurance policy and a sum of INR 7 Lakhs from the PPF Account. This is a net total of INR 42 Lakhs. Here we notice that the term policy combined with a debt investment component gives a return higher than the Endowment policy .However in the long term especially if Mr Ramesh survives the 30 Year tenure Endowment policy is better.
I would like to end this article with the famous saying " Insanity Is Doing The Same Thing Over And Over Again But Expecting Different Results ". You need to remember in an investment decision to choose the best investment option from a series of options available to you.
Cheap Online Term Insurance Plans
A new war is upon you. A war to catch your attention and loosen your purse strings. Online retail is here to stay and its new weapon…A race to the bottom in prices. Brick and mortar stores are running for their lives. Products online are being sold in seconds. Deep discounts (Products sold below the cost of manufacture) are the new weapon.
Can life insurance be far behind? Term life insurance policies are available online at a price far cheaper than what your life insurance agent is selling you. You’re tempted to buy…But should you buy a cheap online term insurance plan?
Ever wondered why term life insurance policies are available online at a discount of 50-60% compared to the one sold by your life insurance agent? The answer is simple..... Cost.
The Insurer (Company which sells the policy) does not require a life insurance agent to come to you and persuade you to buy the term life insurance plan. The Insurer simply offers the term plan online. The Insurer saves about 25% in commissions which would otherwise have been paid to life insurance agents.
There is a savings in the distribution channel. The Insurer does not need bancassurance (Where banks persuade you to buy life insurance and take a commission from the Insurer).
All paperwork which the Insurer does on term life insurance policies have been shifted online and leads to a substantial saving in costs.The Insurer transfers all these savings in cost to you and the online term plan is available at a sizeable discount (50-60%) than its offline counterpart.
In an online term insurance plan you would have to fill the online proposal form yourself. You no longer have your life insurance agent to fill it for you. This is a blessing in disguise.....You can fill the online proposal form accurately which means there is a lesser chance of your family’s claim being rejected.
If you are a smoker you would mention it in the online proposal form. If your life insurance agent fills your proposal form (offline mode) he might forget or deliberately not mention this detail to save your premium (You pay lesser premium if you are a non smoker). This might lead to your family’s claim being rejected.
Online term insurance plans are plain vanilla policies (Simple policies with no added flavors).You cannot get rider benefits in the online term insurance plan.
Rider benefits are additional benefits such as an accidental rider where if you (the policyholder) die in an accident, additional amounts will be paid to you over and above the sum assured. These policies also charge a higher premium for such a benefit.
You would take this plan if you are young (25-45 years) and tech savvy. This is the age when your loan liabilities are high (you have a car loan, home loan or a personal loan) and you don’t want to transfer this burden to your spouse if you are not around.
You would take a high sum assured (about 15 times your annual income + any liabilities) in your online term insurance policy.The Insurer would compulsorily require you to undergo a medical test as you have a high sum assured. Since you are young you would be in good health and you would be easily covered.
Your main worry…The premiums for these online term insurance policies are so less…How will the Insurer get the funds to settle my family’s claims? Online term insurance is a relatively new business and not much data is available on the claim settlement. However there is reason to be optimistic that your family’s claim will be settled.
You are young and healthy when you take an online term insurance policy and insure yourself for a high amount (sum assured). This means you have to take a medical test. Your health details are known to the Insurer and this improves your family’s claim settlement chances.
Life insurance is a contract (Made in good faith) where it is your obligation to disclose all information needed in a correct and proper manner. If you lie your family’s claim is liable to be rejected. You have to fill the online proposal form yourself (Without the help of your life insurance agent) and this means a better disclosure. You would disclose that you are a smoker or have term insurance plans with other Insurers. This means the chances are better that your family’s claim will be accepted.
All Insurers would have to maintain a margin of solvency (Money set aside for daily operations and your claim settlement) and Insurers have the money to settle your family’s claims.
Claims are generally rejected if details are not filled/disclosed in your online proposal form or if fraud is proved. A thorough investigation is conducted by the Insurer if a claim is made in the first two years of taking the online term insurance policy.
Yes. You need to check the claim settlement ratio of the Insurer. Claim settlement ratio is the ratio of the claims settled (paid by the Insurer) to the claims received by the Insurer. A claim settlement ratio of over 90% means it is highly likely/probable that your family’s claim will be settled.If an online term insurance plan which is cheap matches your needs you must avail it.
Myths on Term Insurance
A myth is a story or a belief which may or may not be true. Just as you hear myths on legendary heroes and warriors passed on from generation to generation life insurance is also subject to myth. Time to bury myths about a term insurance policy.
You would buy or not buy term life insurance on the advice of friends or relatives and this makes you vulnerable to misconceptions on term life insurance. My friend cannot be wrong. I have followed his advice all my life. But in choosing a good life insurance policy which matches your needs…He might be wrong.
A term life insurance policy is a pure survival policy where if the Policy holder dies, his family (nominee) gets the money (sum assured) promised under the policy. If the policyholder does not die within the term of the policy no money is paid under a term life insurance policy. A low premium is charged.
A traditional endowment life plan invests the premiums you pay in fixed income securities. AUlip invests your premiums in (shares and mutual funds).These policies are insurance cum investment policies. They have high charges inbuilt in them (paid to agents to sell the policy or portfolio managers who have to invest the money) which is taken from your premium.You’re better off not paying these charges and investing your money yourself in equity or in fixed income securities.
A term life insurance policy caters solely to your insurance needs which is why you take insurance. Never mix insurance with investment. Pay a lesser premium on the term plan and invest the money you save in a good investment.
A term insurance policy is a must if you are just married or have young children. If you die young, the term policy pays your family the sum assured, and they can meet their day to day expenses.If you are unmarried and have no dependents your money can be put to better use by taking a health insurance policy. If you are seriously ill a health policy takes care of the medical bills. A term policy would give you the sum assured only on your death which would not help pay your medical bills.
As you grow older a high premium is paid for the term policy. You would have sufficient savings by the age of 55 years to meet most financial emergencies and you do not need a term insurance plan.If you are married and have no children you can invest your money in fixed income or equity rather than paying premiums on a term life insurance policy.
You need to take sufficient life insurance (coverage) across your working years. If you are in your twenties you need a coverage (sum assured) of at least 20 times your annual salary.If you are in your forties you need a coverage (sum assured) of at least 10-15 times your annual salary. If you are in your fifties you need a coverage (sum assured) of at least 5 times your annual salary.
Yes... The breadwinner definitely requires a term insurance policy. If your spouse is working and she were to die you would lose this income and this would affect the quality of life of your children.
Better education and saving for children’s marriage would be difficult for you to manage alone. The sum assured you get on your wife’s death from the term life insurance policy would help you bear these expenses.
You would have to disclose that you are a smoker when you take a term life insurance policy. You would have to take a medical test and higher premiums would be charged compared to a nonsmoker.
This is true in most cases. Taking a term plan and availing a cheaper premium than a unit-linked insurance plan or an endowment plan is a good idea. The difference in premium is then invested in a good mutual fund or a fixed deposit depending on the risk you are willing to bear.
If you have a disabled child and want to leave money for his/her upkeep then a whole life insurance plan is a better bet .You pay premiums for a fixed time period and you get the maturity amounts 60 years after you take the policy or when you are 80 years whichever is later. You get nothing in your lifetime but your disabled child is well taken care of.
Online term life insurance policy is a recent concept, and an accurate assessment of its claim settlement can be made only with time. However premiums are 40-50% lesser than offline plans.However there is no reason to believe Insurer will not settle your claim. You would have to fill the online form yourself (without the agents help) and this means you would disclose more details about yourself (Better disclosure on smoking).
The sum assured taken is generally high (You insure yourself for a high amount in an online plan) say over INR 50 Lakhs and this makes medical tests compulsorily.This means, the Insurer knows your medical history (as you make a better disclosure while filling the online term insurance forms) and this means your family’s claim should be easily settled.
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