A comprehensive guide to buying term insurance policies

Most of individuals holding expensive life insurance policies find it difficult to decide whether to dump their existence insurance policies for a cheaper term plan cover.

Terms plans -- often termed as cheapest form of insurance are a low premium, higher cover, longer coverage insurance product with an ease of buying online. It is heartening that more and more consumers are looking to buy 'term insurance' and keeping their insurance and investment needs separate.

Term life insurance policies provide financial security for families in the event of the insured's death. Coverage lasts for a set period or term; policy owners can buy term insurance for 5, 10, 20 or even 30 years.

Once the term of the policy expires, the coverage will be terminated. Term policies are inexpensive compared to permanent life insurance plans. Term life policy owners may also benefit from the simplicity and flexible nature of these insurance plans.

For beginners, pure term insurance policies pay the sum assured (or insurance cover) only on the policyholder's death. The policies don't have any investment component. That means that if the insurance buyer survives the term of the policy, s/he doesn't get anything.

However one has an option to add additional benefits such as accidental death and disability benefits and health riders with the basic term insurance policy.

For regular premium policies, the premium once fixed at the time of purchase of the policy remains the same throughout the premium paying term of the policy. If the insurance company experiences adverse mortality -- that is more deaths than what it has assumed at the time of product filing -- the company may choose to increase the premium for new customers.

Courtesy: Investment-mantra.in

In India over a period of time, the mortality experience has been improving for the life insurance companies, which is getting reflected in the low premiums for term life insurance covers.

Increased competition in Indian insurance market consisting of more than 20 private insurers have resulted in term plans being available at attractive rates to what they were couple of years ago.

What should I get at end of term-plan policy? Questions like this shouldn't crop in while buying a term cover. Here, you have bought a term cover and your dependents will be compensated if something happens to you during the term of the cover. If you outlive the policy you won't get anything at the end of the policy.

Why term plans make sense: 

(a) Lower premiums: The premium is lower by up to 40% compared to earlier rates.

(b) Higher cover: Companies are encouraging buyers to take a higher cover. If a Rs 25 lakh cover is priced for Rs 3,695 then a Rs 1 crore cover costs Rs 9,706.

(c) Longer coverage: Cover can be taken till up to 75 years of age as compared to 60 65 earlier.

(d) Buying ease: Online term plans can be bought by individual herself/himself.

Things to remember while buying term insurance:

Adequate cover: Make sure cover is large enough.

Expert advises a life cover of 12 times your annual income minus your investment assets plus any liabilities (includes amount of your outstanding loans). Life insurance is required in case you are earning with your effort and have dependent family members. If that's not the case you don't need life insurance. Young unmarried earning members with no dependents, children, homemaker, retired people don't need life insurance. Make sure you take inflation into account, possible increase in salary and changes in life style of your family.

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 dependents in the family and so on are some of the things that should determine the sum assured of a term life policy.

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 to Rs 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.

Choose maximum term: Pick the maximum term as buying a fresh plan later in life will be costly. Ideally tenure of policy should be retirement age minus you present age. This means if you are 30 now and wish to retire at 60, term of policy should be 30 years. Buy a cover that will offer you protection till you retire.

Cover loans too: If you have big ticket debts, cover them also. You can choose a plan where cover progressively decreases.

Review cover: At every life stage (ideally 3 to 5 years), review your existing life cover and attune it to current needs. Over the period your personal circumstances, income, assets, liabilities would have gone through certain changes. So it's always good to review your requirements after 3 to 5 years.

Mind inflation: As living costs rise, so do insurance needs. Buy more or opt for a plan where the cover keeps increasing.

Buy policy online: Term insurance products are also sold online and these products are much cheaper compared to ones sold by agents and brokers. Selling the products over the Internet does away with the agent's commission thus bringing down the overall cost of the policy.

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 online 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.

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 s/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).

Don't be distracted by riders: Additional covers of accidental death and disability arising from accidents are available on standalone as well, so don't choose expensive term plan just because some of them have riders available.

Disclose everything: Disclose everything to the best of your knowledge while buying the policy including your existing health conditions, family history and all existing and proposed insurance including details of any insurance policy refused or provided at higher than normal premium in the past.

Take medical tests: It will always be good for you to go for medical tests as this will reduce any chances of claim being rejected.

Consider buying policy in blocks: For instance , if you need a cover of Rs 1 crore -- you can buy two policies of Rs 50 lakh each as it provides flexibility to discontinue one policy should your insurance needs reduce over time. Of course it will attract slight additional premium but the flexibility makes the additional cost worth it.

What you should make sure at time of buying the policy:

• Ensure that you read and answer all the questions correctly and accurately to the best of your knowledge.
• Ensure that you have disclosed all material facts to the Company. In case of any doubt as to whether a fact is material or not, the fact should always be disclosed.
• Ensure that all the documents submitted by you (E.g. Age Proof, Income Proof etc) along with the proposal form are genuine
• Go through the copy of your signed proposal form enclosed along with the policy document
• Review and ensure that all the questions have been answered correctly and accurately to your best of knowledge
• In case you come across any discrepancy, please consult with point of contact from insurance company
• Online term plans where a customer buys the policy directly from the company are up to 35% cheaper than their offline versions. By removing the intermediary between customer and the company the world wide web has brought down the price of the cover
• Term plans are especially beneficial for young people with dependents. Low premiums set you free to invest in high-growth instruments such as equity-linked savings schemes (ELSS) initially, which also provide tax breaks

Why insurance agents are not very keen to sell term plans: 

Agents are often not keen on selling term plans since they earn much less commission from them than, say, unit-linked plans (Ulips). Since term plans have no investment component, the lowest premium plan qualifies as the best. So be careful when you have approached a broker for insurance needs.

Make sure you don't shun pure life cover just because you won't get your money back. It is the best gift you can give to your dear ones. Get yourself 'Term Plan-ned' today and keep your investments and insurance separate.

A special note for youngsters in their 20s or early 30s

Working professionals in their 20s or early 30s must have received a call from and insurance company or an agent trying to sell its policy. Point is that insurance in the early years of professional life may sound a waste of money when other lifestyle and personal expenses takes priority. With a change in lifestyle of young professionals which includes long working hours, high stress levels, alarming rise in lifestyle related diseases like diabetes, obesity and cholesterol -- insuring oneself becomes as essential as other expenses.

Investing early in insurance will also help you save tax and instill in you the habit of saving and financial discipline that ensures peace of mind in long run. So, if you are a young professional and have not insured yourself yet, the next time you come across any material related to insurance, give it a serious thought.

Term plans or existing life insurance policies

From cost point of view, it makes sense to switch to low premium term plan product, given the possibility of savings on premium payable. You can use the money saved to invest in your existing investment portfolio. However it's not always advocated to dump the old policies.

With the rising age, insurance premium also goes up which may in turn nullify or reduce the savings on the costs towards the premium. This is especially true if you are over 40 years of age since the premium rise is rather steep for that age bracket. If your existing policy also has a health rider, such as critical illness benefit attached to it, it is better to consider the change in premium for that benefit too.

Giving the limited experience on hand, the riders premium have not materially changed yet. With rising age, the premium payable towards a critical illness rider will also go up. It is better to check the actual total premium payable on the existing as well as new products and calculate the savings, if any, before you decide on to new product.

The second factor that is significant to consider is the state of health. If you are in a good health and can go through the battery of medical tests, you may consider buying a new term life insurance policy. Since term life insurance policies are high risk business compared with other investment oriented plans, underwriters are rather strict with the acceptance of risk.

With rising age, number of tests also goes up and if the buyer is not in good health , s/he may be charged extra premium or in some cases even denied cover. The worst thing to do is to let go an existing cover before the buyer gets a new policy in place.

Should you switch?

If you are sure that you don't want to continue with your existing policies, it is better to take a calculative decision. The first thing to do is to arrive at the amount of insurance you need. In few cases, it may make sense to run the existing policies till the time new policy is two years old. New policy may have some waiting period for certain benefits such as critical illness benefit typically has a waiting period of three to six months.

Last but not the least: do remember the decision of paying the claim rests entirely on the full disclosure of facts in good faith. There are many cases that have been decided by various competent courts in both the insurer and insured's favour. If you act in good faith and disclose all material facts known to you, insurance company will pay the claim. Better buy a term insurance plan for peace of mind and secure future of your family.

Steps to undertake in case of ending your existing covers:

(a)  Ascertain how much insurance you need

(b)  Find out the renewal dates of existing policies

(c)  Initiate the buying process much before the renewal dates of exiting policies

(d)  Check the rider benefits available with new products

(e)  Figure out the premium payable on the new policy

(f)  See if you will be saving on the total premium payable if you switch to new policy

(g)  Check if you are in a good health

(h)  Find out about medical tests required for the new policy

(i)   Buy the policy

(j)   Check the new policy document

(k)  Bring any deviation to the notice of the insurance company

(l)  Let the old policy run for some time to take care of the waiting period in the new policy