Term insurance policy is a life insurance scheme that covers only risk of death and does not offer any survivor benefits. It is like the insurance policy we take for our two wheeler or car – we pay an annual premium – if we have an accident, the repair bills go to the insurance company and they pay the bills subject to some deductions. Similarly, in Term Insurance policy, you take a policy for a specified number of years (let’s say 20 years), and specified cover (let’s say Rs 100 lacs) and you pay an annual premium for the 20 years. In case if your demise in this period of 20 years, your dependants will get the insurance cover of Rs 100 lacs.
Term policy is the plan B of your financial plan. Let’s say you have done a 20 year financial plan and you are earning well and investing well. You are well on your way to get financially independent in a few years. Even though you know that life cannot be taken for granted and anything can happen to you any day – you assume that you will live till you are old –really old. Well that is a fallacy – any one of us could meet our end any day. It is for mitigating this risk of untimely demise, that we need to take a term insurance policy. If your financial plan (your plan A) fails due to your untimely demise, the plan B (term insurance policy) ensures that your dependants are not financially impacted and are safe.
So when should we take a term policy?
The answer is NOW.
Anyone who is earning and has financial dependents, should have a term insurance policy. If both husband and wife are working, then both should take term insurance policies.
The following are the questions that I know you will have and I have tried to answer it:
• How much cover should I take? Take enough so that your dependants will have enough money to replace your income. For example, if your annual income is Rs 10 lacs, then you should take at least a cover of 100 lacs – this 100 lacs, if kept in a FD giving 10%, will give your dependants Rs 10 lacs. But then there is also inflation and taxes.
So the thumb rule is as follows:
1. If you are up to 25 years of age – take a cover of 20 times your annual pre-tax income
2. If you are between 25 years and 35 years old – take a cover of 15 times your annual pre-tax income
3. If you are between 35 years and 45 years old – take a cover of 12 times your annual pre-tax income
4. If you are above 45 years of age – take a cover of 10 times your annual pre-tax income
• What about cover for my loans? You must take loan cover to ensure that in the case of your untimely demise, your family is not saddled with the repayments. For every loan that you have, take a term loan cover.
• My company already has a group term insurance policy -so do I need to take it once again? Typically companies offer term cover up to a certain level. So if your company offers you a cover of Rs 50 lacs – then you calculate the additional cover that you need (based on the calculations shown in point 1 above) and take a cover for that amount on your own.
• Till when do I need the cover? You need the cover till your are financially independent – once you are financially independent of a job, then you financial assets pay for your living and in the case of your untimely demise, your family will still have the financial assets paying for their living. But you cannot be sure of when you will reach financial independant – so take a term policy for a max period – typically till your retirement age. In case you reach financial independence before your retirement age, then you can stop paying the premium and discontinue the policy.
• How much is the premium normally? The table below gives indicative range of premium per year. These are indicative and there are many more insurance companies – so you do your research and take a decision.
Annual Premium for Rs 100 lacs cover till 50 years of age for a non smoker male
|ICICI Pru iCare||19000||23500||30500||41000||56100|
|SBI Life eShield||14500||17300||21500||26500||33500|
|Bajaj Alliance iSecure||14500||18500||25250||32700||43250|
|Reliance online term||8100||10700||14900||21700||27000|
• Do I buy it online or through an agent? No agent will tell you to buy it online. They will also tell you many reasons why you should buy it from them. But remember, an agent is commission biased. Typically, the same policy when bought online would be 20% cheaper – because the agent’s commission is discounted. Further the insurers see the typical online customer as a low risk, educated, reasonably well earning individual -the kind of customers the insurance company wants to attract. So these policies online are aggressively priced as compared to the same offline policy. Remember, your relationship with the insurance company is the same whether you buy it through an agent or buy it online
• What about medical tests? All term life policies bought online will be followed by a mandatory medical test which is funded by the insurance company. The policy premium can change if there are health issues found during the medical tests. One needs to go through this and it is basically good for you as otherwise, how often do you actually go through a complete medical check? But remember that, you will not get the results of the medical tests – that will be sent to the insurance company.
• Is this premium tax deductible? – Yes, -you can claim tax deduction for the premium paid for term insurance policies under sec 80C (up to Rs 1 lac of premium per annum)
One best practice is to give all details to the insurer to the best of your knowledge – correct age, correct salary are important. If you are a smoker – clearly tell them that (it will increase your premium by about 25%). Remember, your family will need to answer some of these questions to the insurer in the case of your un-timely demise.
Also if you notice, the table above clearly mentions male. The premiums for women are higher by about 10%. Now do not ask me why – some FAQ’s do not have an answer.