What is Term Insurance?
Term insurance plans are pure protection plans. In this type of policy, only the risk of death is covered for the term of the plan. If the insured does not die within the term of the plan, then no payment is made to the policy holder. This is also the cheapest form of life insurance. Term insurance is the best & the most important form of insurance and one should take as high a cover as possible as early in life. Take a cover of 15 to 20 times your annual income. Keep increasing as your income increases.
What are the benefits in a term insurance policy?
High cover at low premiums
Since this is a pure risk cover and no money is kept aside for investment component, term insurance policies provide a high amount of cover at very low premiums. A healthy 35 yr old male gets to protect his family’s financial security for 50 lakhs by paying an annual amount as low as Rs. 6,000 or even lesser. Term insurance is the most important life insurance policy that one should have.
Peace of mind
Term insurance plan is probably the most important financial instrument that one should have. It is sadly often ignored as it does not have any maturity benefits. It is strongly recommended that all earning members who have dependents take adequate term insurance and not rely on the one provided by your company.
The premiums paid and the payouts made in case of death are tax free.
Most Frequently Asked Questions on Term Insurance.
How much Sum Assured / cover should I take in a term plan?
The amount of Life Insurance coverage you need will depend on many factors such as:
- How many dependents you have
- What kind of lifestyle you want to provide for your family
- How much you need for your children’ s education
- What your investment needs are
- What your affordability is
As a general practice, calculation for Sum Assured in a Term Insurance policy is : –
Minimum Sum Assured = (Annual Income x 10 times + Loans/Liabilities) – Liquid Assets (like : gold/silver,fixed deposits,mutual funds ,pf,ppf etc.)
What is the policy term I should select?
You should choose a policy term till your retirement age or may be till a few years after retirement. Term insurance is taken to cover the risk of loss of income. So ideally take term insurance for a period in which you will be earning money. Beyond that period, the premiums paid by you will become a burden for you.
The higher the term, the higher will be the premiums. So if you take a plan till the age of the 65, you will notice the premiums are lower than the same plan if you had taken it till the age of 75.
Will I have a problem at the time of claim if I buy online term insurance plan?
No, you will not face any problem just because you purchased the plan online. Every insurance company has a centralized customer service team which attends to all the customer query/complaints. They do not differentiate between customers who have purchased online or offline. The Claims Management division of the insurance company processes the claim without questioning where was the policy purchased from.
It is important to understand that it is only the mode of sale which has changed. There is no change in the conditions of the policy. Just like a few years back, you had to buy an airline ticket through a travel agent; till some time back even insurance plans could only be purchased through some agent or broker. With the internet becoming a more convenient and transparent mode of sale, insurance companies have now launched online plans which can be purchased by the customers.
What is the difference between term and endowment insurance plans?
Term insurance is a pure risk cover and a product which is an absolute must for every individual who has any dependent relying on their income. You typically should take a term insurance cover of 20 times your annual income. In term insurance, if you die, your nominee gets the sum assured. In case you survive the policy term, nothing is paid out to you. They are by far the cheapest form of cover.
Endowment Plans on the other hand are plans which are a combination of both insurance + investment. You get a life cover and you get an investment component also. You keep paying during the course of your policy term and at the end of the policy term you get a maturity amount. A variation of Endowment plans are Money Back plans where some part of the benefits are paid to you at regular intervals during the policy term itself. Usually the insurance cover you get in these plans is not great or sufficient for the policyholder’ s dependents but they can be used as good investment tools. There is a sense of discipline and you keep paying regularly and build a corpus which can be used for some major cash requirement at the end of the policy term – say for your child’ s higher education or marriage or for buying a house.
Why is there a vast difference in premiums of various term insurance plans?
Insurance premium is an amount paid by the policyholder to the insurance company in return for the risk cover. Every insurance company assesses the risk differently and accordingly decides the premium. So if Company A assesses your risk to be low, they will offer you lower premiums. But if Company B considers you to belong to a high risk profile, then they will offer you high premium amount.
There are some other factors also which determine the premiums. Much like any other product, competition is also a factor. Just as affordable prices for a product attracts more customers, here too more affordable premiums for the same benefits will attract more customers. So some company may charge a lower premium to attract more customers while some companies will continue with their premium pricing.
Indian insurance market was opened up only in the year 2000. Before that there was only LIC with no competition. So you will now find a lot of aggressive products and pricing being launched by different companies to reach out to a larger number of customers.
Even within the insurance companies, you will find rates dropping as the years pass as the understanding on the Indian market and associated risks gets better and better. You will find less riskier customers get more attractive rates than others.
What is the claims ratio of different companies?
IRDA publishes an annual report which shows the detailed status of claims of every insurance company. An extract from the IRDA Annual Report 2014-15 is provided :
Why there are so much difference in premiums in online & offline term plans?
There are so much difference because of Branch network cost, Advisers and administration team cost, literature and advertising cost also includes in offline policies so they are 10-25 % costly then online policies.
But in our opinion to take policies from your nearby and well known (having good track record of services) advisor, so that they can serve you properly .