One of the very first steps you will take as you go about securing the financial future of your dependents is buying the best term insurance plan. It becomes important to choose the best term insurance plan for you given what an important part of your financial security toolkit is, and the fact that term plans are at the moment not portable (ability to move between insurers) like health insurance plans. But this is easier said than done, given the sheer number and variety of policies on offer. Here are the key components of a term plan you should look at and the important factors to consider in narrowing down to the best term insurance plan for you.
Let’s start with term life insurance is
A term life insurance plan is a plain vanilla insurance product that will make a payout (known as the sum assured) to the dependents in the event of the death of the insured while the policy is in force. The policy stays in force for a fixed term and only makes a payout if the death of the insured occurs within that term. For this assurance that the insurer provides, the insured makes regular payments to the insurer known as premium. Several factors go into the computation to arrive at the premium such as sum assured, medical history and lifestyle (such as smoking). However, right at the top of the list is the age of the insured.
Term plans are known to be affordable and even more so if the insured is young, giving one the ability to lock into a lower premium for a higher sum assured. They frequently come with options related to premium payments, sum assured, benefit payout structure etc. and also optional riders. Although tax benefits should not be a factor in an insurance decision, the icing on the cake is that life insurance premiums are deductible under section 80C of the Income Tax Act.
Who needs term life insurance?
Most of us have probably been advised by well-meaning friends and family to get a good life insurance plan the moment we landed our first job. While this is definitely not bad advice, it is important to know whether we need a policy and what sort of policy will fit. While we are told that early lock in would help get a lower premium, a better deciding factor would be the presence or number of dependents (parents, children, spouse) that rely on your income.
The main objective of a term plan is to replace your financial contribution to your dependents going forward even though some insurers promote it as a way for retirees to leave behind an inheritance. Even if your family is not financially dependent on you, the presence of a loan that you are servicing such as a home or vehicle loan, calls for a term plan so that your family is not saddled with the liability, if an unforeseen event were to occur. But there are some scenarios in which a term life insurance plan may not be needed and this article will throw more light on that.
Scenarios when you might not need a term plan are
- when you have no income or
- you have no dependents or
- if your net worth affords you that luxury
How much sum assured does one need?
There are several ways to tackle this question right from online human life value calculators to thumb rules (the most popular being 10 -15 times your annual income) or just a number that sounds large enough to make you feel comfortable, the favourite being Rs. 1 crore. This could however leave you under or over insured. What would give you a better estimate of your sum assured requirement would require a little time and effort to be put into the maths behind the following (box below)
Factors to consider in determining your sum assured
- your contribution to your family’s finances that would need to be replaced until your retirement,
- financial goals that you would have funded such as children’s education and purchase of a home and
- outstanding loans that would need to be repaid such as a vehicle / home loan.
Our earlier article ‘How much life insurance do you need?’ is a must read if you are trying to determine how much life cover you need and our term insurance calculator factors all this in and could be very handy in arriving at how much cover you need.
What should the term of your term insurance be?
With life expectancy constantly expanding, the temptation to go in for a term plan that lasts until one is well into their 80s or a whole life plan that lasts until you are 99, is huge. But this may not be the best use for your money. Insurance underwriters are very conscious of the increasing probability of mortality as you age and will charge you a much higher premium for a term life insurance policy that lasts well into your 80s rather than one that just lasts until retirement age.
Based on the corresponding increase in premiums, we think it doesn’t always make sense to stretch the term of your life insurance plan and a cover up to 65 -75 years of age would be sufficient. For a detailed look at how much your premiums could go up by and what would be the best term for your term insurance plan, take a look at our earlier article on ‘Until what age should your life insurance last?’.
Options and Riders
While term life insurance policies are very simple products, insurers offer you the opportunity to ‘customise’ them through options and riders. Options allow you to choose limited premium paying terms, rising sum assured, monthly benefit payments as against a lump sum payout among others. These options could have an impact on your premiums or not provide you with the flexibility you need and need to be looked at carefully. We have done a detailed analysis of how each of these options work and when you should consider them and you can read about it here.
Riders, a tool to cover additional risks for an extra premium are add-ons to the basic term life insurance plan. Riders such as accidental death / disability benefit and critical illness benefit serve a very useful purpose but come at an additional cost and sometimes also come with a lot of exclusions. Here again, we’ve done the homework for you on how riders work and choosing them and our article ‘Do you need riders on your term insurance plan?’ lays it out for you.
How we picked the best term insurance plans
A term life insurance plan, although a simple product, is a critical one and comes with a degree of commitment as it requires you to pay premiums and stick with the insurer for the long haul. Of course you can just stop paying premiums and go to a new insurer but this has its disadvantages and there is nothing like getting it right at the start. While it may be tempting to go for the one with the lowest premium or the one with the most features, there is more to be considered. So here is how we picked the best term insurance plans.
- First, we arrived at a shortlist of insurers based on their pedigree, stability and financial soundness which is critical as the insurer should have the ability to meet a claim, should the need arise.
- Then we ranked the pure term products of the shortlisted insurers based on a mix of criteria such as stability, size, claims settlement and premium.
- Our final ranking of best term insurance plans can be found here.
Alternatively, if you would like to do a bit of DIY to arrive at the best term insurance plan, our e-book ‘All You Need to Know About Term Insurance’ authored by Aarati Krishnan (login or register for a free trial to access the e-book) and the DIY Term Insurance Selection Tool could be your best friends.
