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Big Story | How to pick life insurance cover

Bavadharini KS | Updated on July 06, 2020 Published on June 27, 2020

Given that a term plan is a plain-vanilla life insurance policy, there are many products in the market at competitive rates and with attractive frills. We explain the various aspects of a term policy, help you cut through the clutter and pick the right one

The outbreak of the Covid-19 pandemic has thrown our lives out of kilter. It has also reinforced the importance of having a life insurance policy.

Term life insurance cover is a simple way of protecting an individual’s family, especially when he/she is the breadwinner. While the loss of an individual will be difficult for the family to cope with, life cover offers financial comfort and stability.

 

Given that a term plan is a plain-vanilla insurance policy, there are many products available in the market at competitive rates and with attractive frills. But you should assess all factors such as premium payment, sum assured, duration, covers and riders, not to mention the track record of the insurer in settling claims, before picking a term policy.

We explain the various aspects of a term policy, help you cut through the clutter and pick the right one that suits your needs.

Going for the right cover

Before we delve into the various nuances of a term policy, let us look at the broad types of term covers available in the market. Conventionally, a pure term life policy is meant to replace the life insured’s income for her dependents. Hence, it is important to understand the different types of sum assured (SA) options.

Level term

This is the most basic and common type of cover. In a level term cover, the premium payment and the life cover you choose remain constant for the duration of the policy.

The premium amount depends on factors such as sum assured, age, lifestyle habits and the policy term.

In case of demise of the policyholder within the policy term, the nominee gets the entire sum assured, but if the policyholder survives the policy term, she gets back nothing.

Increasing term cover

Given that life insurance is a long-term product, the initial sum assured may seem inadequate after a period of time due to inflation. Increasing term covers help factor in inflation.

The sum assured increases every year by a certain percentage and stops after the maximum limit is reached.

In term policies such as LIC’s Tech-Term or SBI Life’s eShield, you get to choose between the two benefit structures — a level cover or an increasing sum insured cover. Here, the premium amount charged is higher for the increasing cover.

For instance, in LIC’s Tech-Term with a ₹1-crore SA, for a policy term of 20 years (male, age 30), the premium works out to ₹7,216 (excluding GST) per annum. In increasing the SA (10 per cent increase every year, up to twice the base SA), the premium works out to ₹10,350 (excluding GST) per annum.

In the case of SBI Life’s eShield plan, the premium works out to ₹9,400 (excluding GST), and for the increasing cover (10 per cent increase in SA at the end of every fifth policy year), the premium is around ₹11,720.

While the difference in premium is notable, it may be worth going for such covers if you can afford it, as it can shield you from inflation to some extent.

 

 

Decreasing term covers

Another variant of a term plan is the decreasing term insurance plan where the sum assured decreases every year by a fixed percentage.

Products such as Edelweiss Tokio Life’s Zindagi Plus, HDFC Life’s Click2Protect Plus (Life option) and Aditya Birla Sun Life Insurance’s Life Shield Plan offer the flexibility to reduce SA after attainment of certain age, say 45 years. Accordingly, your premium will be recalculated as well.

Normally, these plans are pitched to you if you are nearing retirement or for providing a cover for your liabilities, such as a home loan. But given that a term policy’s main object is to provide financial stability to your family in your absence, taking such covers may not be such a good idea.

True, your liabilities reduce over the years, but taking a constant cover can help your family pay off the debt as well as meet other exigencies.

Return of premium

Term insurance policies don’t provide any return or maturity benefits if a policyholder survives the policy term.

Hence, they are often not preferred much. Life insurers now offer variants called return of premium (ROP) plans.

As the name suggests, such products return the premiums paid for the policy, in case you survive the policy term.

Some of the products that offer the ROP feature include Canara HSBC OBC Life’s iSelect Plus, Bajaj Allianz Life’s Smart Protect Goal, Exide Life’s Smart Term Plan and Tata AIA’s Sampoorna Raksha Plus.

But such products normally come with higher premiums. For instance, for Bajaj Allianz’s Smart Protect Goal plan with an SA of ₹1 crore (30-year-old male, policy term of 60 years), the premium works out to around ₹8,158 per year (excluding GST).

Now, if you opt for ROP, the premium shoots up to around ₹17,027 per year (excluding GST).

Paying such a steep premium for an ROP option is not advisable. After all, if financial protection is what you are seeking, it is better to stick with a level or increasing term cover.

The additional premium you would end up paying for ROP can instead be invested in other investment options, say, a bank FD.

Decision drivers

With a broad sense on what’s on offer, let us look at how to pick a suitable term insurance policy. Since the features of term covers are broadly similar in the market, it is easy to compare and shop for term policies than other insurance policies.

How much cover?

To start with, you need to pick the right amount of sum assured. Remember, opting for a low cover only to save on premiums will serve little purpose. At the same time, taking too big a cover can pinch you, as you would have to cough up a large premium over a long period of time.

The SAs startas low as ₹5 lakh and go up to ₹20 crore or more. Generally, experts recommend that you should have a policy with a death benefit at least 10-20 times your gross yearly incomeWhile you can consider this as a basic thumb rule, it is important to assess your personal requirements based on other factors, too, such as your liabilities.

Our take:If you have huge liabilities, you need to take them also into account while deciding the cover. At the same time, if you have large assets, you can lower your cover accordingly to avoid paying higher premiums.

Also, a cover amount which looks adequate today might not cover your family’s needs tomorrow. So, you need to take into account the inflation factor at the time of taking a term insurance plan.

You can go for an increasing cover plan or a level sum assured plan with higher a SA, with suitable riders.

 

Basic riders

To enhance the benefits of a term policy, almost all such covers come with rider options (additional benefits to the policyholder at an additional cost). The advantage of a rider is that an additional amount (up to rider’s SA) will be paid to the nominee in case of demise of the policyholder, over and above the base SA.

Common riders include accidental death benefit, where the chosen (rider) SA is paid in the event of death due to an accident.

Accidental disability benefit offers additional payment, in case of total and permanent disability due to an accident, which results in permanent inability to perform any occupation for remuneration or profits.

Other prominent riders include critical illness and terminal illness riders, where a specified sum assured is paid upon the diagnosis of an illness. Once the rider claim is paid, your base policy will continue to be in force either at a reduced premium, or the premium might be waived.

In case of ‘waiver of premium’ rider, all future premiums for the term cover will be waived if the policyholder is unable to pay due to permanent disability due to an accident or on being diagnosed with a critical/terminal illness.

Some of the products that offer most of these riders include ICICI Prudential Life iProtect Smart, Aditya Birla Sun Life, HDFC Life Click2Protect Plus and PNB MetLife Mera Term Plan.

There are also products in the market that come with built-in riders. For instance, ICICIPru Life’s iProtect Smart (all-in-one option) comes with a terminal illness benefit and waiver of premium on disability, across all four variant of the products.

You can choose other options of the same product if you don’t want all the riders. Similarly, SBI Life’s eShield comes with terminal illness cover built into the policy, but offers accidental death and accidental total and permanent disability as riders.

Our take: While you make your purchase, look for additional benefits in a term policy, depending on the needs of your family. Do keep in mind that if you opt for all the rider options available, your premium amount will go up.

For instance, if you select a pure term policy of iProtect Smart, the premium for a ₹1-crore cover for a policy term of 30 years (for a 30-year-old male) works out to ₹18,929 per annum (inclusive of GST).

If you add critical illness and accidental death benefit riders, your premium goes up to ₹33,926 per annum (inclusive of GST).

Therefore, better go for a specific rider instead of opting for all. In most cases, it is better to go with a base policy with an accidental death benefit rider option.

Right policy term

It is always advisable to buy a life insurance policy earlier on in your life — the mortality charge, which determines the premium, is based on the entry age. But what should be the duration of the policy?

The longest policy term offered is 82 years with the maximum age at maturity of 100 years. But the main purpose of a life policy is to provide support to your family in your absence. So, would you really need a policy that long, when your dependents may not need your support, and most of your financial goals would have been met?

Our take: Remember, longer the policy term, higher the premium.

Hence, choose a policy term based on how long your family may need financial support. Of course, you need to invest separately to take care of your other goals and build your retirement kitty.

Premium payment term

Premium payment term (PPT) — the duration for which you pay the premium — may not necessarily be equal to the policy term.

To offer flexibility to policyholders, insurers provide various options of PPT — single, limited and regular.

In the first option, you pay the premium at one go, while in the limited option you can choose the number of years you wish to pay the premium (say, five, seven or 10 years).

In a regular option, you pay the premium throughout the policy term. Obviously, the quantum of premium will vary across these options. While the amount of annual premium will be higher in the case of limited PPT (or single), the total amount of premium outgo for the entire policy term will be the highest for regular PPT. (Read more: How to choose the right premium payment term for your life insurance policy)

Our take: The advantage of a regular PPT is that it may be easier on your pocket as you can pay lower annual premiums over a period of time.

But if you can afford to pay a higher premium, going for a limited PPT may be more cost-effective.

Lump-sum or regular payouts

Till sometime ago, insurers offered only one mode of payout — lump sum.

On the death of the insured, the entire benefit was passed on to the dependents. But insurers now also offer staggered payout options.

Your dependent can receive the insured amount as monthly instalments over a period of time. It could also be a combination of lump-sum and staggered payouts.

For example, in Kotak Life’s eTerm plan, a lump-sum payment of 10 per cent is done on death and the remaining is payable at 6 per cent (of SA) at the end of every year for 15 years; a monthly option is also available.

Some policies such as HDFC Life’s Click2Protect 3D Plus offer a lot of flexibility — you can decide on the amount of payout, the payout period (maximum 20 years) and also the rate increase every year. Some others may offer lower flexibility on the payout period or the rate of increase.

But the premiums are slightly lower in such cases. So, which one should you go for? The monthly payout option — where the entire death benefit is split over a period of time — would not make sense.

This is because, considering the time value of money, receiving the entire ₹1-crore life cover today would obviously be worth a lot more than receiving it over 10 years.

Our take: In the case of an increasing income option, you need to check the internal rate of return. If it is much lower than that of other fixed-income options such as bank FDs and post office schemes, it may not make the cut purely on returns.

But if you feel that your dependents may not be able to manage large sums of money, a guaranteed monthly income, say, 30-40 years from now, may not be such a bad idea.

You can go for a combination of lump-sum and monthly payouts. The lump-sum portion can take care of immediate liabilities that your family may need to settle.

Other factors

In addition to the above-mentioned factors, it is also important to check the claim settlement ratio of the insurer. Given that you consider term policy to offer financial stability to your family, the claim settlement quality of the insurer is crucial.

Look into this ratio before you decide to buy a term cover. This ratio is available in IRDAI’s (Insurance Regulatory and Development Authority) annual report, company websites and insurance aggregator websites.

Then there is the solvency ratio, which is a critical metric for an insurance company. Essentially, it is the size of the insurance company’s capital in relation to the risk it takes — assets minus liabilities. Simply put, it measures how financially sound an insurer is and its ability to settle claims.

IRDAI mandates a minimum of 1.5 times solvency ratio for insurers.

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Published on June 27, 2020
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