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How to choose the right term insurance plan for yourself

Almost all insurers offer such policies. Find out which variant is best suited for your insurance needs.

, ET Bureau|
Updated: Apr 29, 2019, 07.28 PM IST
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The tenure of the insurance policy is almost as important as the cover it offers.
They are well educated, have access to latest information and are very tech savvy. Yet, a recent survey conducted by Max Life Insurance and Kantar IMRB shows that millennials score low when it comes to money matters. Only 45% of the respondents aged 25-35 have heard of pure protection term plans and barely 17% have bought such insurance policies. “Millennials follow the YOLO (You Life Only Once) principle. They want to spend on fine dining, latest gadgets and costly garments while the need to buy insurance is put on the backburner,” says Vineet Arora, Managing Director & CEO, Aegon Life Insurance.

Why aren’t millennials buying enough protection for their families? “Many young people don’t have any immediate liabilities or dependents so there may be no need for insurance. Others want to spend on tangible things that drive immediate gratification instead of focusing on the longer term,” says Santosh Agarwal, Chief Business Officer, Life Insurance, Policybazaar.com.

Buy now to avoid paying more later
Premiums of Rs 1 crore insurance cover till the age of 65
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Premium rates of Aegon Life Insurance e-Term Plan for male non-smokers; premium inclusive of GST

This is both worrisome and perplexing. Life insurance forms the bulwark of a good financial plan. Everybody needs an insurance cover that can effectively replace his income after settling all outstanding debts. Sole or primary breadwinners without adequate insurance are playing with fire. The good news is that term plans are ultra cheap if bought at a young age. A 30-year-old man will pay barely Rs 9,000 a year for an insurance cover of Rs 1 crore till the age of 65. Delaying the purchase doesn’t save you any money. With every year of delay, the overall cost climbs up ( see graphic).

Want to pay once or annually?
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How it helps: Though costlier, single premium suits those who are not disciplined and might miss renewal deadlines. Useful for buyers who can spare money now but may not be able to pay later.

Spoilt for choice
Ten years ago, Aegon Life Insurance launched the first online term plan in India. Almost all insurers now offer such policies with additional features. There are single premium plans, limited premium payment plans, increasing cover plans, staggered payout plans and even plans that return the entire premium if you survive the full term. Each of these variants is useful in certain situations. While this profusion of choices is good news, we believe it can also become a problem. It could be that many millennials have not been able to decide which policy to buy. Our cover story aims to cut through the clutter and help readers choose a suitable term insurance cover.

Choose the right term
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How it helps : It doesn’t cost much to extend the cover to beyond the working years of an individual. But it adds the possibility of a moral hazard where the individual’s death is seen as leading to a big gain.

To be fair, a small but growing number of millennials understand the need for protection against unforeseen events. Meet Ahmedabad-based finance professional Ketan Shah (see picture), who has bought a cover of Rs 2 crore. “I needed an insurance cover big enough to take care of all liabilities at an affordable cost. This term plan fits the bill perfectly,” he says. Read on to know how you can also choose the right policy for yourself.

Ketan Shah, 30 years, Ahmedabad
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Income: Rs 1 lakh per month
Insurance cover: Rs 2 crore till age 65
Premium: Rs 19,000 per year
“I drink on social occasions and mentioned that in the form. It has bumped up the premium slightly but leaves no chance of claim rejection.”

How much cover and from whom?

As mentioned earlier, the insurance cover should be able to replace your income and settle outstanding loans. The thumb rule is to be covered for at least 8-10 times your annual income plus any outstanding debts. Buy from an insurance company with a healthy claim settlement record and a good reputation for customer orientation. When he was buying a term plan, Pune-based software engineer Nitin Gawade (see picture) chose the insurer on the basis of the claim settlement record.

Nitin Gawade, 30 years, Pune
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Income: Rs 1 lakh per month
Insurance cover: Rs 1 crore till age 65
Premium: Rs 18,600 per year
“Although the premium of my policy from LIC is quite high compared to private insurers, the company’s claim settlement ratio is high.”

A Rs 1 crore cover may seem adequate right now but inflation will keep eroding its value. For this, some companies have designed plans that increase the cover every few years. The cover increases by 5-10% every few years, but there is a cap on the maximum increase. “The actual inflation could be different, so the enhanced cover may not exactly protect against inflation. Yet, it does minimise the impact of inflation and protects the real value of money,” says Anil Kumar Singh, Chief Actuarial Officer and Appointed Actuary, Aditya Birla Sun Life Insurance. “If you anticipate that your insurance needs will go up later in life, buy an increasing cover now instead of leaving it for the future,” he says. Buying a fresh cover later could be expensive. Also, if your health condition deteriorates, the cover could even be denied.

Limit premium term if you can’t pay later
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How it helps: As payment tenure reduces, the premium goes up. But this is a useful option for those who may not be able to pay the premium later as their liabilities are likely to rise.

Don’t avoid medical tests
Companies usually put buyers through extensive medical tests before issuing a term policy. However, in some cases a company may not insist on a medical test but merely ask the buyer to give a declaration of good health. Not going for a medical test may be convenient, but will be costlier. The premiums are lower if the medical test shows that the applicant is in good health. “If one can get better premium rate basis his medical tests, he should certainly go for them,” says Singh of Aditya Birla Sun Life Insurance.

Saikat Chakraborty, 34 years, Kolkata
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Income: Rs 1.2 lakh per month
Insurance cover: Rs 1 crore till age 70
Premium: Rs 17,000 per year
“I needed the insurance cover to extend beyond my working years in case I have some liabilities during retirement.”

More importantly, a thorough medical examination fortifies the policy against claim rejection on grounds of a pre-existing disease. Once you go through the medical tests, the onus of spotting the pre-existing disease shifts to the company. “Technically, if an individual is unaware of a pre-existing medical conditions and doesn’t declare it at the time of application, a company can’t deny the claim. However, it is advisable to go for a medical check-up, simply to avoid any chances of non-disclosure,” says Agarwal of Policybazaar.com.

Choose a suitable frequency
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How it helps: Monthly payments are easier but also increase the chances of missing the premium. Go for monthly or quarterly payments only if the annual premium is too high and impacts the cash flow.

Get the tenure right
The tenure of the policy is almost as important as the cover it offers. Like Goldilocks, don’t choose a tenure that is too short or too long. Ordinarily, the cover should be till the age of 60-65 years. Don’t buy a plan of 15-20 years which will end when you are in your 50s. The insurance needs are highest at that stage of life. Buying a new policy in your 50s will be very costly. You might even be denied the cover if you have developed a health condition. Companies also offer very long-term covers till 90-100 years. A large cover that extends till that advanced age helps people leave behind a legacy for their heirs. But experts are not impressed. “We recommend taking a cover till the age of 65-70 years. Most of the liabilities of an individual are already covered by that time,” says Srinivasan Parthasarathy, Senior Executive Vice-President and Chief Actuary, HDFC Life Insurance.

Add an accidental death rider
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How it helps: Adding the accidental death rider pushes up the premium but enhances the cover substantially. the waiver of premium rider is very cheap but watch out for exclusions.

For those who may not be able to pay the premium in later years, companies have designed limited premium payment plans. You pay for 10-15 years though the cover continues for 30-35 years. Such limited premium payment plans will be especially useful for those who plan to start their own business after working for 10-15 years.

Dipankar Pal, 35 years, Delhi
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Income: Rs 1.05 lakh per month
Insurance cover: Rs 3 crore traditional plan
Premium: Rs 16,000 per year
“I am looking for a term plan where the cover automatically increases every few years. Then I won’t have to buy more cover when I am older.”

Similarly, single premium plans require a large payment at one go. They suit self-employed professionals with lumpy incomes. “They are also a good option for someone who may have got a huge payout such as an annual bonus,” says Aalok Bhan, Director and Chief Marketing Officer, Max Life Insurance.

Do you want full premium back?
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How it helps: Buyer doesn’t gain much. If additional premium of Rs 7,489 is invested every year in bank deposit, even at nominal return of 5% it will grow to Rs 5.38 lakh in 30 years.

A major problem is the perception that term plans are a waste of money because you don’t get anything back. So, insurers have designed policies that return the entire premium, though some experts feel this is not a good idea. “Just as one does not expect return of car or health insurance premium, one should not expect the return of life insurance premium,” says Karthik Raman, CMO & Head – Products, IDBI Federal Life Insurance. Others feel that the perception of getting back your money may be misplaced, but it does make people buy the cover they need. “The comfort of overall premiums returning to the wallet could expand the term insurance customer base,” says Samit Upadhyay, Chief Risk Officer and Head, Product, Tata AIA Life Insurance.

Increasing cover to fight inflation
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How it helps: The increasing cover plan is costlier by 20%. It may not fully take care of inflation but the enhanced cover will do away with the need to buy more insurance later in life when liabilities rise.

Lastly, choose the right payout mode. If your family is financially savvy or you have a financial adviser, opt for lump sum payment. Otherwise, go for the staggered payment option. “Monthly payouts are suited for families who need a regular income and are not very investment-savvy,” says Manish Sangal, Chief Distribution Officer, Retail, Bajaj Allianz Life Insurance.

(All premium rates sourced from Policybazaar.com)

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