Buying a term plan

Following the request from some of our readers here's giving you the basics of a term policy and a guide to go about buying one. A term insurance plan is a pure risk cover that gives financial security to the insured's family on his unfortunate demise.

So, when you are looking at term plans , the first step is to determine your ‘cover' requirement.

Financial advisors insist on a life cover that is 10 times the annual salary of an individual. But keep in mind that his is just a thumb rule. Your life cover should be decided based on your long-term commitments.

The loan burden (ongoing housing/ personal loan, etc.) that will fall on the family post your lifetime, the impending cash requirements for children's education, wedding, healthcare needs of the spouse and other dependants in the family and so on are some of the things that should determine the sum assured of a term life policy.

Benefits

On claim, the benefit under a term policy will be paid as a lump-sum to the insured's nominee or the beneficiary of the policy. And the good news here is that this lump-sum amount doesn't fall under the tax net. Insurers give term life policies for a maximum tenure of 30-35 years now.

The policy's premium will rise as the sum assured increases and the insurer may also require a medical check-up. For a male aged 30 years and a sum assured of Rs 30 lakh, the premium of a pure term policy is around Rs 5,000-8,000 (for a term of thirty years) now. And, if you are looking to buy a rider with the policy - say a personal accident cover, then cost will add up further.

Rules for buying

Now that the basics of a term policy are clear, let's move on to how to buy one. When buying a term life policy, it is best to go online with several life insurers now offering the online option for buying term policies. When buying online, the advantage is that you save on premium. Agent commission, which is a significant proportion of the cost associated with an insurance product, is not charged while buying policies online but is passed on as a discount to the buyers.

In on-line policies however, one has to go through some minimum documentation work (and medical check-up too if required). But in simple steps, you can get a quote and apply for the policy on the insurer's website itself. Aegon Religare, ICICI Prudential, Kotak Life are some insurers that are offering term policies online.

However, the premium on the policy should not be the only deciding factor here. The reputation of the insurer is also a key factor. For this you can check the insurer's ‘claim settlement' ratio - this is the percentage of claims settled by the insurer of the total he received.

The information on this is available at IRDA's website, in its annual report for 2009-10. The insurer with the highest claim paid ratio is Life Insurance Corporation (96.5 per cent), followed by HDFC Standard (91.1 per cent) and ICICI Prudential (90.2 per cent).

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