When opting for a life insurance policy, you have a choice between an endowment plan and a term plan. An endowment plan offers a “sum assured” which is the amount guaranteed as a payout to your nominee in the unfortunate event of your death. If you survive the policy tenure, you receive a lump-sum amount which is the sum assured plus added bonus accumulated during the stipulated period. On the other hand, a term insurance plan does not provide a lump-sum if you survive the stipulated period but offers a large payout in the event of death. The advantage of a term plan over an endowment plan is that it offers a large payout at a very small premium – which can be paid monthly, quarterly, bi-yearly or annually. This is useful when the objective is security as opposed to savings. There are multiple term plan products offered by different insurers at varying prices. So what factors does one need to consider while opting for a term plan? We have listed some aspects you should take note of before choosing a term plan:
a. Objectives: Lay down the objectives of going for a term plan. Plan your plan payout – monthly, quarterly, annual – and plan your finances accordingly. It is important to be clear in your mind around the objectives as there is no lump-sum paid out at maturity/end of plan tenure.
b. Time Horizon: A term plan is used to effectively secure your dependents against your outstanding liabilities. It is also an effective mechanism to secure your family against loss of income. Given these aspects, evaluate the time-frame during which you will need to continue to stay protected. It is a good idea to opt for a longer term as the cost of subscribing to a term plan later in one’s life stage will be prohibitively expensive. Also, the earlier you opt for a plan, the better – the premium payout rises with age.
c. Human Life Value: We have briefly discussed liabilities and earnings as two key areas that term insurance will help secure against. Human Life Value (HLV) is computed taking these two factors into consideration. Simply put, HLV is computed taking into account your future earnings/income plus assets in hand minus liabilities. Identify your net value in rupee terms and use this figure as the base to determine how much term cover you should go for.
d. Cost: As discussed earlier, term cover is available at a relatively lower premium. Also, different insurers provide term plans at different prices – sometimes, the price for similar plans might vary significantly. Evaluate what’s on offer carefully and read through the policy details in great detail. A non-smoker gets a premium discount because the insurer is, in principle, at a lower risk to cover this individual. Also, the sooner you decide to subscribe for a term plan, the better – because the risk factor to cover an individual increases with age. And most importantly be sure to compare different plans to get a clear sense of what’s on offer.
e. Claim Settlement Ratio:
This is an important factor to look for while choosing your term insurance plan
. Claim Settlement Ratio is an indication of the number of insurance policy claims that get honoured against all policy claims. A low claim settlement ratio indicates the insurer has a history of higher policy rejections. Therefore, you will have to watch out for this metric.
f. Rider: Insurers let you attach add-ons to your primary policy, commonly known as “riders.” This is analogous to ordering for toppings to your pizza. By attaching riders to your base policy, you can avail additional benefits over and above what is applicable as part of the base policy. Subject to policy conditions, you can avail a “critical illness rider,” “disability cover,” etc. For instance, a critical illness rider offers a lump sum amount at detection of illness itself. Thus securing the policy holder against the cost of treatment, medical consultation and other expenses that come with critical illnesses.
g. Online purchase: Many insurers provide a discount for purchasing a policy online. So do a thorough comparison of what is on offer and understand the details of the product before you go ahead and choose a plan.
The most important factor to keep in mind while choosing a term plan is whether the plan covers your need to secure your dependents adequately. Decide on the tenure of the plan, the amount of cover and purchase mode based on some of the points mentioned above.