Term Insurance Plans – All You Need To Know
For families, financial planning is an essential part. They plan for health uncertainties with health insurance; parents plan for children’s education by saving in special education funds. In the same way, many plan for wedding expenses and retirement, too. But what happens when an earning family member passes away unexpectedly. The family members, in most cases, have to face financial troubles, which at times becomes a full-fledged financial crisis.
That’s why there are term insurance plans – designed as financial protection and support for families and dependents. Are you wondering if buying term insurance is worth it? Are you wondering how much insurance is enough for your family? Or have other questions about term insurance? We’ll tell you all about term insurance.
What is term insurance?
Term insurance is a kind of life insurance that provides death benefit upon the policyholder’s death. It does not provide any benefit if the policyholder lives beyond the policy period. Since the benefits of term insurance are limited, it is available at an affordable premium. In a nutshell, term insurance is a way to provide financial protection to one’s family at a reasonable and affordable cost.
Term insurance is not a plan in which one can invest for returns over the investment for self. It is primarily a financial security plan for the family and dependents of the policyholder.
Term insurance premium
There are two types of premium methods – single premium and regular premium.
Single premium: True to its name, a single premium is where the entire premium for the policy is paid upfront at the beginning of the policy. For example, if a policyholder has bought a policy for 25 years, he would have to pay the premium for 25 years at one go. In case, the policyholder dies in the 6th year of the policy, the premiums for 25 years would have already been paid.
Regular premium: Regular premiums are those which are paid annually or according to the period decided by the insured and the insured at the start of the policy. While premiums can also be paid half-yearly, annual premiums are the most popular.
Term insurance sum insured
In term insurance, the sum insured is paid to the nominee after the policyholder’s death.
Term insurance plans are usually considered better because one can have a large sum insured for a small premium. In term plans, the sum insured is fixed and not flexible. Meaning the insured cannot increase or decrease the sum insured once the policy is underwritten.
Here’s an example
Sunoj bought a 50 lakh term insurance about 3 years back. He then realized that the sum would not be sufficient and wanted to increase the sum insured to 1 crore. However, it is not possible for Sunoj to get the sum increased. A better strategy would be to buy an additional policy for Rs 50 lakh so that he has a total sum insured of Rs 1 crore. However, there is a catch. In the last 3 years, the premium of the plan would have gone up so you will end up shelling out more for similar cover. That is why it is always advisable to determine your term insurance cover factoring in future needs.
Payout of sum insured
Typically, insurers pay out a lump sum to the nominee upon the death of the policyholder. However, some insurance companies also provide the option of periodic payments. Here the sum insured is broken and paid out in parts. This allows regular cash flow for the beneficiaries.
Types of term insurance plans
Level term plans – fixed sum assured and payout to the nominee upon the death of the policyholder
Return of premium plans – provide maturity benefit, premium are paid back if the policyholder survives
Increasing term plans – sum assured can be increased at an annual frequency
Decreasing term plans – sum assured can be decreased at an annual frequency
Convertible term plans – allows the plan to be converted to another plan
Term plans with riders – provides the option of buying riders such as critical illness cover, accident cover, or disability cover
With so many options, how does one zero-in on a plan most suitable to their needs? Let’s look at how to go about choosing a life or term insurance plan.
Buying a term insurance plan
Buying a term insurance needs due diligence from your end as well. It will help you determine which plan is best for you. And if you thought buying term insurance is going to be easy, it’s far from easy. Here’s why:
- A term insurance plan seeker may have to go through additional medical tests and submit health related documents. This is more so in case of high value insurance covers. Some insurers even insist on income proofs.
- A policy seeker may have to pay higher insurance depending on the age at which s/he is buying the plan and the current health conditions.
- In some cases, the application can be denied if there are discrepancies or the policy seeker shows signs of serious health issues.
Term insurance eligibility
Of course, insurance is a business for insurers and they would want their business to grow by selling more term plans. But insurance is a risky business for insurance companies and hence they consider many parameters to assess every application. Here are the parameters that insurance companies usually assess for an applicant’s eligibility. The idea is to reduce their risk of underwriting the risk to the extent possible.
Insurance is a tool that covers health-related risks against premium paid by the insured. Hence, for the insurer it is important to assess the applicant’s current health status as well as medical history. It helps the insurer know if the health risk of an applicant is insurable and then determine the appropriate premium. In technical terms this process is called underwriting.
If the applicant were suffering from obesity, diabetes, hypertension, or other such serious health issues, the insurer would not only be extra cautious, the premium for such applicants might be higher. Alternatively, the insurer may also insist on a lower risk cover.
Another red flag is in the case of heavy smokers and drinkers. Typically, the term insurance premium for smokers is higher compared to non-smokers.
Family medical history is also a key determinant in the insurer’s decision about premium and whether or not to underwrite an application. Insurers are normally cautious where the person has a family history of diabetes, hypertension or other genetic issues.
The older an applicant, the more cautious insurers are. The younger an applicant, the easier it is to get the term policy application through. Most insurers prefer underwriting term insurance for those under the age of 65 years. A history of early deaths in the applicant’s family due to lifestyle or chronic illnesses can impact underwriting.
Finance, occupation, education
Whereas health has a more direct relation to underwriting, insurers also take into account the financial health of applicants, their occupation and education.
Generally, insurers are cautious about offering a sum insured of more than 20-25 times of a person’s annual income. Higher income individuals usually have better chances of a higher sum insured.
Education too plays a key role as insurers prefer to underwrite term plans for those with qualification of a graduation and above. Education would determine the earning capacity of a policyholder and the capability of payment of premium.
Insurers also consider the occupation and profession of the applicant. An applicant with a high-risk job might not get a policy easily or may get it at a higher premium. Self-employed, freelancers and those with irregular income may find it difficult to get their application underwritten.
Do you need term insurance?
Not everyone should buy a term insurance plan. You should buy term insurance when there insurable interest. That means; if you are earning member and your demise would cause financial losses to the family.
Buy term insurance if:
- You are the sole earning member in a family
- You have family and dependents
- You want to avail tax benefit from term insurance premium
Don’t buy term insurance if:
- You are single and do not have any dependents. However, you can take a term cover if you plan to get married in the near future.
- You are retired and not earning any income
- You are financially dependent on your family and cannot pay premium. In that case, only the earning member requires insurance.
Factors to consider when selecting term insurance plan
Now that you know the ins and outs of term insurance and its features, let’s take a look at some additional factors that you must consider when choosing a term plan.
Claim settlement ratio: When choosing insurance plans and insurers, it is essential to consider the claim settlement ratio as it helps you know the history of settlements. A low settlement ratio of say, 40% or 60% should be a red flag and an indication to stay away. After all, you do not want to leave your family members with any uncertainty once you are gone. This figure is disclosed by IRDA on an annual basis.
Company reviews and credibility: Reading reviews online or asking for recommendation or experiences of friends doesn’t hurt. It only clears any doubts or gives a better picture about an insurance plan or the insurer.
Claim process and sum insured payment process: The claim process and sum insured payment process of different insurance companies may be different, hence it is advisable to understand the process beforehand. The nominee and family members should also be aware of these procedures.
Here’s a comparative table showing different term insurance plans offered by insurance companies, and the approximate premium for different age groups.