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News & Views

Tuesday, Sep 11, 2012

The best way to buy term insurance

[Source : Business Line]

Take a cover that factors in your future income and living expenses. Go for as long a tenure as possible. Buy online. And don’t go overboard with the riders.

Insurance companies offer a confusing range of products, with fancy names and many bells and whistles. But the most important type of insurance you should buy is still the plain term cover. It comes pretty cheap, too.

But do you just buy one? What are the main things you should know while buying a term policy?

You need to be aware of factors such as what the insurance policy actually covers, the amount you need, premium rates, riders, medical tests, tax benefits and the mode of buying, among other things. You should also know the fine-print aspects such as splitting amount across policies.

What term insurance is

But first get this. Term insurance, unlike endowment policies or market-linked plans, is not an investment at all. It does not give you a return. It merely seeks to cover risks.

That is why term policies are the cheapest insurance you can buy. For the same sum assured, the premium you pay in a term plan will be far less than that in an endowment plan or ULIP.

Specifically, a term cover is taken so that your family is not financially deprived in case you were to die suddenly.

The idea is that the sum received on your death can be used to meet your financial commitments such as home loans, children’s education, their marriage, etc.

So, you pay a specified premium for a given sum assured and this sum would be given to your nominee, if something were to happen to you, so that they can continue to enjoy their existing lifestyle without having to unduly compromise on expenses.

Choosing the cover

Now that you know it’s cheap, should you just splurge on a Rs 1-crore policy? Your life is priceless, isn’t it? Maybe it is, but there is a scientific way to decide how much term cover you need.

The concept is called human life value. This is nothing but a sum of all your current and future liabilities.

So, you need to figure out your annual salary, regular expenses, home loan instalments, credit-card dues, cost of children’s education and marriage.

Since most of these goals pertain to the future, you also need to factor in inflation into your calculation.

If this sounds daunting to you, it isn’t. All life insurance companies have calculators that enable you to systematically put in all the details under various cost heads and arrive at a target sum. This method is quite rigorous and rarely goes wrong.

Those looking for shortcuts can do this: apply a multiplier to your annual salary to decide on the sum assured that you need.

This ranges from six times if you are in the 18-24 age bracket to 12 times if you are 35-44 years of age. So, if you are 30 (multiplier is 10 in this case) and earn Rs 10 lakh annually, you may need to take Rs 1 crore as the sum assured.

Of course, the multiplier cannot be blindly applied as the sum does depend on subjective factors such as when you marry (early or late) or have children (early or late) and so on.

In such cases, you should draw up a statement of all assets and liabilities, future goals, etc, and decide on a sum assured.

You may choose to reduce the sum assured by calculating the present value of your investments, if you are a tad aggressive. But if you want a margin of safety, you can ignore your investments.

So, in the above example, if you had Rs 10 lakh as liquid investments currently, you will need to take a term cover for only Rs 90 lakh.

For how long?

The next important thing to do is to decide on the tenure of the policy.

This should ideally be till you decide to retire. That is, your intended retirement age minus your present age should be the policy tenure.

Of course, the implicit assumption is that you would have completed all your financial commitments and settled your children by the time you retire.

If you are not sure of that, buy a policy for as long a term as possible. The premiums are going to get steeper as you grow old!

The best price

For a 30-year-old male and for a 25-year policy term, the premium for a Rs 50-lakh cover ranges from Rs 7,200 to Rs 15,500 across insurance companies. These rates are for purchases made in the conventional way through agents.

In the case of online purchase made from an insurance company’s Web site, the rates drop dramatically to Rs 4,500-7,640 for the same sum assured. Insurance companies pass on the benefits of not having to pay agent commission and low processing charges online to you in the form of lower premiums.

Companies such as HDFC Life, ICICI Prudential, Aegon Religare, Aviva, Bajaj Allianz and Bharti AXA are prominent players offering term cover online.

If your sum assured is large, say, in excess of Rs 1 crore, you can also split your requirement across two-three policies across insurance companies, say, Rs 50 lakh assured each if the required cover is Rs 1.5 crore.


Along with the basic policy, you may be offered riders such as for accident, critical illness, dreaded diseases, etc.

If you opt for any of these, each one of these can escalate your premium rates by 15-20 per cent.

Our suggestion is that, if at all needed, take only the accident rider as for a slightly higher premium, your normal sum assured would be topped with an accident sum assured, which could be to the tune of half your basic sum.

Avoid other illness riders and opt for them with your health insurance policy instead, where it could work out cheaper.

Do I get tax breaks?

All premiums made for buying a term cover would give you tax benefits under section 80C. In case you opt for illness riders, that portion would qualify for additional tax deduction under section 80D.

Finally, a word of caution. Do not opt for a lower sum assured just because a higher sum assured entails a medical test.

If necessary, take the test as you can be assured that all medical facts are known to the insurance companies and factored into the premium rates. This will greatly boost the case if claims are made.

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