Nov 8, 2009

Term Insurance Plans: FAQs

Photo by Marco Bellucci

The earlier post: Lesser known details about term plans, examined why term plans are considered as the best way to insure life and why insurers and agents are reluctant to sell them.

This post will answer some of the questions frequently asked about term plans such as basic features, types of term plans, maximum tenure of a term plan and best term policies available in India.

Term Insurance Policies: FAQs

1. What are term Plans?
Term plan is a pure risk coverage life insurance plan with no maturity benefit that takes care of your family or dependents in case of any unforeseen eventuality. It provides a lump sum to the family in case of death of the life assured during the policy tenure.

Other Unique features of Term Plans:
1. No surrender benefits
2. No Paid up value
3. No benefits are payable on maturity / survival
4. Most of the policies also offer riders such as Accidental Death Benefit (ADB), Permanent Disability Benefit (PDB) and Critical Illness Benefit (CIB) on payment of additional premium.


2. Are term insurance plans eligible for tax benefits?
Premium paid on term insurance policies is eligible for tax deduction under section 80C and death benefits are exempt u/s 10(10d) of IT Act, 1961.

Furthermore, premium paid on critical illness rider is eligible for tax benefit u/s 80D of IT Act, 1961.


3. Are the term plans available in the market similar in all respects?
Broadly speaking, yes they are similar with minor differences in terms of duration, maximum entry age, minimum and maximum sum assured, cost etc. I’ll be reviewing few of the term insurance plans in subsequent posts.


4. How many types of Term Plans are there?
There are broadly two kinds of term insurance policies – Pure Term Plans without return of premium (WROP) and Term Plans with return of premium (ROP).

Second classification is based on conversion option. There are simple term plans without conversion option and convertible term plans.

Convertible term plans provides you an option to convert your term plan into another insurance policy at a future date. For example, Kotak Term Plan offers you conversion option to convert it to any other plan offered by Kotak Life Insurance (except for another term plan) provided there are at least 5 years before cover ceases.

Majority of the term insurance plans available in the market are non-convertible type.

There is yet another factor (sum assured) based on which we can group them. First is a level term insurance plan and second is increasing sum assured term plans. As opposed to level term insurance plans, where sum insured remains constant throughout the term of the policy, in case of latter the cover keeps on increasing as you grow older. For example, in addition to level term cover, SBI Life Shield also offers you 2 other options of increasing sum assured. Under the first option, the basic sum assured increases by 5% for each policy year and in the second option there is a 50% increase in the cover after every 5 years.

Finally, like traditional insurance plans and Ulips, we can also distinguish term policies based on premium payments. First kind is single premium plan (paid in lump sum at the time of purchase of policy) and the other one is regular premium plan (paid at regular intervals).


5. What’s the difference between term plans and home loan term plans?
While term insurance plans provide same coverage (i.e., level term cover) throughout the policy term, home loan covers come with declining coverage i.e., which reduces in line with the loan amount and expires when the loan is fully repaid. In other words, the coverage provided under declining liability home loan term plans (such as ‘ICICI Home Assure’ and ‘HDFC Home Loan Protection Plan’) decreases as the outstanding loan amount decreases.


6. What’s the maximum tenure of a term plan?
The maximum duration of term insurance policies is generally 25 years with a few companies even offering term plans for a term up to 30 or even 35 years.

There is yet another condition that maximum age can’t go beyond 60 or 65 years (some plans extend even up to 70 or 75 years).

For example, while HDFC Term Assurance Plan is available for maximum tenure of 30 years with the second condition that maximum age at expiry not to exceed 65 years, ICICI Pru Pure Protect Classic is also available for a maximum duration of 30 years but maximum age at expiry is increased to 75 years. Therefore, an individual aged 45 years looking for a term plan for 30 years can choose the term plan of ICICI in comparison to HDFC.


7. How to Compare various term plans? Is the premium quoted by the insurance companies on their brochures final? Or, are there any other charges involved?
Yes, the premium charges mentioned by life insurance companies on their brochures are final. But understand the following:

a. While some life insurance companies quote the premium rates inclusive of service tax (& Cess), others quote the rates exclusive of service tax.

b. The rates quoted are standard rates applicable in case of a healthy male individual (non-tobacco user). In other words, while smokers and unhealthy individuals are usually charged extra premium (due to high mortality risk), women policy holders are offered discount from the standard rates (due to low mortality risk).

c. While comparing term plans of various life insurance companies, one should also ensure that age of the individual, sum assured, tenure / duration is same across all the plans.


8. Which is the best term plan available in the market?
Although term insurance plans are commoditized products (i.e., all the products available in the market are more or less the same), still you can choose the best one in terms of costs, duration, coverage. The best plan should be the least expensive while providing for maximum coverage and available for maximum duration.


In next part, I’ll tell about the practical tips on how to go about buying the best term plans.


Also see:
1. Most Amazing Fact about Life Insurance
2.
Lesser Known Facts about Term Plans
3.
Understanding Life Insurance

16 comments:

  1. Hi thanks for the informative advice. Also wanted to know whether i can make a lumpsum payment (in advance say premia for 5 yrs) in a term plan. thanks.

    ReplyDelete
  2. No, you can’t make an advance payment for a few years. But you can pay insurance premium in advance for the entire duration of the term plan by opting for a single premium term plan.

    ReplyDelete
  3. Hi Anonymous...It would be better that you opt for the regular premium in place of a single premium. Reason as below.
    1> Single Premium Option : Assuming that the sum assured is Rs.100000.00 , premium per year is Rs.5000 and duration of policy is 20 years. In the lump sum option , you would pay Rs.100000.00 on day 1. If anything should happen to you in the next year (God Forbid!!) , the insurance company would pay your next of kin Rs.1000000. You have already paid Rs.100000.00 and the nett benefit would be Rs.900000.00.

    2>Yearly Premium Option : Assuming that the sum assured is Rs.100000.00 , premium per year is Rs.5000 and duration of policy is 20 years. In the yearly premium option , you would pay Rs.5000.00 on day 1. If anything should happen to you in the next year (God Forbid!!) , the insurance company would pay your next of kin Rs.1000000. You have already paid Rs.5000.00 and the nett benefit would be Rs.995000.00.

    Hence it would always be better to distribute the risk. If you are uneasy about the availability of funds on a yearly basis , you could park the immediately available fund in a fixed deposit (with a firm vow that you would never touch the same) and withdraw the yearly premium. In effect , you would distribute the risk as well as earn interest in the bargain.

    ReplyDelete
  4. Your blog is simple and good. While going through your posts, there is some kind of peacefulness that I feel. Keep up the good work. - P.S.

    ReplyDelete
  5. I have taken HDFC term assurance plan for 30 yrs.Is it good or should I switch it to some other company next year?

    ReplyDelete
  6. Shalom: Yes, your choice is good.

    ReplyDelete
  7. Hi Mr. Fisher
    In case you've reviewed a few of the term plans, will appreciate if you could tell which of your articles?

    regards,

    ReplyDelete
  8. Hi,
    Need your sugguestion. A pure term plan for 20-30 years with regular premium of 30000 with SA of 1 Cr or a plan with return of 125% premium after 20 years, SA 1 Cr & yearly premium of 108200/-.This plan is from Birla Sunlife & the total cash back is 26 Lacs after 20 years.
    Thanks.

    ReplyDelete
  9. Thanks for clearing doubts in such a simple manner.
    Kindly advice that is it worth it to go for a term plan as a fighter pilot(high risk profession) where the premium would be high.

    ReplyDelete
  10. The need for adequate life insurance coverage is more for people working in high risk professions.

    ReplyDelete
  11. AnonymousMay 31, 2010

    What multiply of salalry one can opt for taking higher sum assured under term plan- Gaurav

    ReplyDelete
  12. Hi,

    Want to buy a term insurance for 50lacs,25 yrs,my age is 35 yrs...Which one would you recommend among these :
    LIC Amulya has a premium of Rs.19,850
    HDFC SLIC's Term plans has a premium of Rs. 17,637 and
    ICICI's Term plan for the same cover has a premium of Rs. 17,898

    what do you suggest should i go with the cheapest premium HDFC/ICICI or stick to LIC (the highest premium but also has a high claim solevncy rate)

    ReplyDelete
  13. AnonymousJuly 25, 2010

    Hello Fisher,
    I am thinking of taking 2 Term insurance from different compamy (50L each). At present I am thinking of taking one from LIC. For other I am thinking of goinh with ICICI or HDFC. Please advice whether I should go for ICICI or HDFC. Also please advice if going with LIC is good or not.
    Regards
    Debu

    ReplyDelete
  14. Hi Fisher,
    Any advice on online Term Insurance and which insurance company/ies are best for term plan. I read lot of articles and HDFC and Kotak stand out...Your views please.

    ReplyDelete
  15. helllo my agent says i cant have SA of above Rs25 lakhs as i started earning 1 month ago .my annual income will be Rs.2.5 lakhs. is the correct?
    can email me on-atanu2700@gmail.com

    ReplyDelete

You’re welcome to post a comment if you’d like to air your views, or if you’ve any further question to ask, but please stick to the topic and don’t forget to write your name.