All you need to know: Term Insurance

All You Need To Know About Term Insurance?

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What is Term Insurance?

Term Insurance or any other type of Life insurance is a contract between the insured policyholder and the insurance company. It is often called as a pure insurance since there is no investment element and the there is payout only incase of death during the policy term or in Return of Premium policies the total premium is returned at the end of the policy term.

What Is Term Insurance?

10 Features & Benefits of Term Insurance

1) Financial Security

It is one of the biggest benefit to the family. We have seen many times that untimely death of the bread earner of the family leads to financial problems for the family. It takes care of this problem.

 

2) Affordable

These Plans usually have very low premiums when compared to other types of Life Insurances

 

3) Flexibility on premium payment

It provides the flexibility to pay premiums either Monthly, Quarterly, Half Yearly or Annually. Additionally, they also offer option of limited pay which means a policy holder can decide to pay for 5 years or 10 years or till his retirement.

 

4) Flexibility on Life Cover

It provides flexibility to the policy holder to choose the number of years he wants to get covered. From 10 years to Life long cover which means the person insured can choose to be covered till the Age of 100 as well !

 

5) Riders

Many Term Insurances now offer various riders like Critical Illness, Terminal illness, Hospicare and Disability riders. Buyers should consult their advisor and analyse these riders and add them to their term insurance

 

6) Waiver of Premium (WoP)

In cases where person insured faces loss of income due to an accident or mishap the insurance company can waive all the future premiums which are payable. This not only continues the cover for the security of the family but also decreases the financial burden on the family incase of loss of income. 

 

7) Return of Premium

Many insurance companies offer a Return of Premium feature. This feature is helpful when the policy holder survives the term of the policy. The insurance company returns all the insurance premium that the policy holder has paid. 

 

8) Joint Life Option

Recently this feature is being provided by few insurance companies where Spouse also gets a cover. In the unfortunate event of death of primary policy holder the policy continues for the surviving spouse and in some cases there is a Waiver of Premium benefit as well. 

 

9) Staggered Payout of Claims

All term plans offer a lumpsum payout to the nominee in case of death of policy holder. However in many cases due to family disputes or lack of financial knowledge there is a chance that the lumpsum payout gets misused. In such a scenario the policy holder while buying the policy can opt for a Staggered payout for the nominee. However the nominees do have an option to take the entire claim amount in lumpsum but at a discounted rate. 

 

10) Increasing / Decreasing life cover

Some companies offer you the option to increase or decrease the coverage amount. This is helpful because as you grow old your responsibilities change which warrants a change in the total coverage amount.

 

How Much Term Insurance Should You Have?
How Much Should You Have?

How much Term Insurance should you have?

While there is no one size fits all formula but below we list out four methods to calculate How much Life Insurance you need – 

1. Thumb Rule

While most people use 10 times the annual income as the required cover it is not an accurate measure. The 10 times annual income thumb rule became popular as Underwriters usually provide a coverage which is 10 times the annual income. So if the Annual income is 20 lakhs a 10 times cover would mean a 2 crore cover should be taken. 

2. Income Replacement

Here the logic is that the life cover should replace the potential income of the breadwinner in case of his/her death. So the cover should be Your Current Annual Income * Number of years left to retirement. So if you are 40 years of age and your annual income is 10 lakhs and the retirement age is 60 so the cover that will be required is (60-40) * 10 = 2 Crs

3. Expense Replacement

This is the reverse of Income replacement. Here the individual calculates all the expenses including household expenses, cost of life goals like children education, any existing loans etc and from this number the value of existing investments is subtracted to arrive at the required life cover. 

4. Human Life Value

Here we calculate the future income, investments, expenses and liabilities of the person to arrive at his economic value. Since inflation is taken into calculation hence this is a better method to calculate the required life cover.

 

10 things to avoid while buying Term Insurance

1. Small Insurance Covers

Do not go for a cover which is smaller in size compared to your present lifestyle and income. As a thumb rule choose a cover which is at least 10 times your annual income.

 

2. Shorter Policy Terms

Many people take shorter term policies as they are inexpensive and have lower premiums. However it should be kept in mind that the Average Life expectancy is 70 years in India. And if you do not smoke or drink there is a good chance you would survive well over the Average Life expectancy. Hence Insurance companies have also launched 100 year term plans.

 

3. Hiding Medical Conditions

While buying insurance if you hide your existing medical conditions than it can have a negative impact on issuance of policy or during claim settlement.

 

4. Buying Insurance late in life

This is one mistake which many people do. The problem is if you wait for too long the premiums become very expensive and the chances of getting a policy from insurance company also decreases. So buy when you are young and healthy since premiums are low. Normally insurance policy premiums remain fixed for the entire duration of the policy.

 

5. Low claim settlement ratio

Check claim settlement ratio of various insurance companies and avoid insurance companies that have low claim settlement ratio.

 

6. Hiding Smoking and Drinking Habits

It is very important to disclose if you are a smoker. Hiding this material information can lead to rejection of issuance of policy or claim settlement. Insurance companies also ask in the form about the quantity of smoking and drinking and the duration from when the person is smoking or drinking.

 

7. Not opting for riders

Insurance Companies offer Critical illness, disability, terminal illness, hospicare riders which buyers should not avoid totally. In fact they should proactively engage with their advisors in understanding them.

 

8. Cancelling policy due to loading

Sometimes post medical check up insurance company adds a loading charge on the premium. This charge is usually due to some pre existing medical condition like BP Diabetes etc.  A buyer should accept it as having a slightly expensive policy is more important than not having a policy at all.

 

9. Not checking the filled form

This is a common mistake made by buyers. If you have not filled the form yourself then it is important that you check the completely filled form before submitting it to the insurance company. Avoiding this simple mistake can lead to a smooth claim settlement.

 

10. Nominees not informed

It is important that nominees are informed that you have bought an insurance policy and also share the payment receipts.
Cancelling policy due to loading – Sometimes post medical check up insurance company adds a loading charge on the premium. This charge is usually due to some pre existing medical condition like BP Diabetes etc.  A buyer should accept it as having a slightly expensive policy is more important than not having a policy at all.

 

Historical claim settlement ratio of various Life Insurance Companies

Company2020-212019-202018-192017-182016-17
Aditya Birla Sun Life98.04%97.54%97.15%96.38%94.69%
Aegon Life99.25%98.01%96.45%95.67%97.11%
Ageas Federal95.07%96.47%95.79%91.99%90.33%
Aviva Life98.00%97.53%96.06%94.45%90.60%
Bajaj Allianz Life98.48%98.02%95.01%92.04%91.67%
Bharti Axa Life99.05%97.35%97.28%96.85%92.37%
Canara HSBC OBC97.10%98.12%94.04%95.22%94.95%
Pramerica Life98.61%98.42%96.80%96.62%90.87%
Edelweiss Tokio Life97.00%83.44%95.82%95.24%93.29%
Exide Life98.64%97.03%98.15%96.81%96.40%
Future Generali Life94.86%95.28%95.16%93.11%89.53%
HDFC Life98.01%99.07%97.15%97.80%97.62%
ICICI Prudential97.90%97.84%98.58%97.88%96.68%
IndiaFirst96.81%96.65%92.82%89.83%82.65%
Kotak Life98.50%96.38%97.40%93.72%91.24%
LIC98.62%96.70%97.79%98.04%98.31%
Max Life99.35%99.22%98.74%98.26%97.81%
PNB MetLife98.17%97.18%96.21%91.12%87.14%
Reliance Nippon Life98.49%98.12%97.71%95.17%94.53%
Sahara India97.18%89.45%90.16%82.74%90.21%
SBI Life93.09%94.52%95.03%96.76%96.69%
Shriram Life95.12%91.61%85.30%80.23%63.53%
Star Union Dai-Ichi95.96%96.96%96.74%92.26%84.05%
Tata AIA Life98.02%99.06%99.07%98.00%96.01%

(Source: https://www.irdai.gov.in/admincms/cms/uploadedfiles/annual%20reports/Annual%20Report%202020-21.pdf)

*Bold Figures show claim settlement over 98%

 

We hope this articles gives you get a fair idea of What is Term Insurance, Features & Benefits, How much should you have etc. If you need any assistance on Investments, Insurance or How To Invest In Mutual Funds Feel free to contact Wealth Baba. We will try to help you out in the best possible way.

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