Navigating the maze that is personal finance

Tuesday, 30 May 2017

The basics of Term Insurance

What is it ?
A term insurance plan ensures that in the event of your death your family does not face financial difficulties, by paying them a lump sum amount that you were insured for (and paid premium towards while you were alive).

To make this happen first you have to choose:
a) amount to be insured e.g. 1 crore (usually 10 times the present annual income)
b) premium payment – either lump sum (one time premium, which is no longer popular) e.g. 2 lakh rupees one time payment or annual premiums paid at fixed rate like rs 10000/- annually (this is just an example and not actual premium for 1 crore)

So if you are 30 yrs old and want to insure yourself for 1 crore till 60 yrs of age then you will have to pay say Rs.10,000/- annually till 60 yrs or till you are alive. So in case of your demise anywhere between 30-60 yrs, your family will get 1 crore lumpsum. Once the policy holder dies no more premiums are paid.

You may be required to undergo medical checkup at the time of applying for policy.

Premiums
These are usually at flat  rate and depend on age of your taking policy. So the earlier you insure yourself in life the lesser annual premium you pay.A higher amount ensured attracts higher premium for same period.

Unless otherwise mentioned in the policy the premium may go marginally up every year (make sure to check this part while buying policy- flat premium or changing premium).

Premiums are also decided by your lifestyle (e.g. smoker needs to pay higher premiums), occupation (e.g. high risk jobs like working in construction industry attracts higher premiums for the same amount insured as compared to low risk jobs), pre-existing illness (those with pre-existing diseases such as hypertension, diabetes etc. have to pay higher premium).


Maturity

The policy matures at the demise of the policy holder and is payable to nominee mentioned in the policy.

Note: always be truthfu1 and disclose any illness or any other information that you deem necessary to avoid rejection of  claim on your policy if the need arises.


How much it should be ?

The amount ensured is usually 10 times the present annual income. However one may argue that as you grow older your income increases along with your expenditure and so does the need to increase the amount ensured.the answer to this dilemma is that this will happen at any stage of life. But at some point you will have to decide to take the plunge and its better to do it today than tomorrow (for the financial cover that it provides in case of any untoward event). If at some point of time later in life you feel that cover would be inadequate you can either opt for increasing cover option (not yet popular- as the cover increases so does the premium) or you can buy an additional cover if required (for e.g. you think that your family would need 1.5crore instead of 1 crore that you are insured for, you can buy a separate 50 lakh cover).

There is another school of thought that says after a certain age (like in early 50s etc) when your children are settled and you have completed most of your responsibilities, you do not need to pay huge sums towards insuring yourself. If you are one such person , opt for decreasing cover  after a certain age, but this is not yet popular in India.

Pure term insurance

Pure term insurance plans are those plans with fixed or increasing premium over the period of insurance (e.g. 30 yrs or 20 yrs or whatever period you have chosen). Depending on your age once you have decided the amount of cover the premiums are paid in lump sum or annually till the period of coverage. At any point of time during the policy being in force (i.e- you are regularly paying premiums) if the policy holder dies, the amount ensured is paid to the nominee and no more premiums are paid (this can be 2yrs later or 20 yrs alter while the policy is in force.). If nothing happens to policy holder till the end of period insured then the policy expires and nothing is given back to the policy holder (i.e- pure term insurance is not an investment product but a purely insurance product).


Indexed term insurance

Indexed term insurance plans are those plans which take inflation into account once you have decided the cover value in present day. The index term insurance will ensure that the cover remains inflation adjusted during the coverage period (for  e.g. value of 1 crore will be equal to lets say 3 crore after 30 yrs (hypothetical inflation adjusted value); in this case your premium will keep increasing so that if something happens in the 30th year of policy, your nominee will get 3crore. The premiums are however are higher for these type of term insurance and also keep increasing with time.


Term insurance with home loan

This type of term insurance comes along with home loan and ensures that in case of your demise, the burden of paying EMI against your home loan does not fall upon your family. The period insured under this type of term insurance is equal to the period of your home loan tenure (say 20 yrs). With time as you pay your EMI’s your liability reduces (i.e the loan amount decreases) and so does the premium for this liability protection product. However, at the closing of the loan (that is loan is fully paid), no amount paid is returned.


E term insurance plans
These are not a different category of term insurance. The only difference is that these term plans can be directly purchased by you by providing details directly to the insurance provider rather than any agent. The premiums are lower for e-plans than the same plan bought through agent as the middle men is not involved and saves cost to the insurance provider which is hence passed to the consumer that is the policy holder.


What to look for while searching for term insurance ?

Premium- for the same amount ensured, different insurance providers may demand different claim. Lower premium should not be the only criterion while choosing policy provider.

Settlement ratio- this is a very important aspect of choosing insurance provider from an array of options available and should be the deciding factor. This ratio defines the percentage of claims settled / paid from total claims that a provider received in that particular year.
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1 comments:

  1. Hello, just wanted to add that these days insurance companies are offering staggered payments ( eg monthly) instead of lumpsum to the nominee in case of demise of policy holder. However the lumpsum payment should be opted for as it is more advantageous. Thanks for the consise and crisp information.

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