Term life insurance is the most basic form of life insurance. And I can safely say that it’s the most effective and the best form of insurance.
Because it gives you a very high insurance coverage (sum assured) at a very low premium. It’s perfect!
Many of you know about the benefits of choosing a term plan when compared to the whole menu of the available life insurance varieties. But this post is for those who are still not sure whether buying term insurance makes sense or not.
So here are answers to a few common questions that people have about term insurance plans.
Q1: How does Term Plan work?
A1: The buyer buys a term plan for a specified tenure. Let’s say 30 years. Now if the premiums are being paid regularly, then if the insured person dies between today and the 30th year, the insurance company will pay the sum assured to the nominee. If the person does not die during the tenure of the policy, nothing will be paid to either the insured person or the nominee.
Q2: Most people won’t die. So money paid in term plan premiums will be lost?
A2: Wrong way to look at it. Term plans are incredibly cheap. You can get a term plan of Rs 1 crore for just Rs 10,000 or even lower. On the other hand, a traditional insurance plan (like moneyback and endowment plans) can cost about Rs 25,000 for just a Rs 5 lac cover. The first thing to note is that this doesn’t make sense when you compare it with term insurance premiums. Second is that if you die, a payout of Rs 1 crore is more useful for your family than a payout of Rs 5 lac. Agreed that you won’t get anything back in term plan if you live. But what if you want to buy a Rs 1 crore cover using a traditional plan? Try to find it out. The premium will be so huge that you might not even be capable of paying it. So term plan allows you to give bigger protection to your family at a much lower cost.
Q3: What if I am lucky and don’t die? In any case, the premiums would be lost right?
A3: Read the answer to the above question again. That should convince you. Remember, insurance is being bought to protect the financial well being of your family if you die. It is not for your well being. But if it could make you feel any better, what you can do is this – Instead of buying a Rs 5 lac endowment plan for Rs 25,000, you go ahead and buy Rs 1 crore term plan for Rs 10,000. The amount you saved this way is Rs 15,000. Right? Invest this amount every year in equity funds. Chances are high that the total value of your investment after several years (like 20-30 years assuming that is your insurance policy tenure) will be much higher than what your Rs 5 lac endowment plan would give on maturity. And what more, all this while you had a big cover of Rs 1 crore as you bought the term plan. You get the best of both the worlds.
Q4: How much term insurance cover should I take?
A4: It is quite popular to go by thumb rules and take a sum assured of 15-20 times your current annual income. So for example, if your annual income is Rs 10 lac, you can buy a cover of about Rs 1.5 crore. But it’s better to not go by thumb rules alone and instead calculate it correctly. You can refer to this detailed post that I have already written on this topic – How to calculate the right life insurance amount?
Q5: How to decide the Right tenure of the Term Plan?
A5: Under most circumstances, an insurance cover may not be required much beyond retirement. And that is simply because most of your financial goals will be over by then and you would also have accumulated enough money to take care of your dependents (mostly spouse) if you were to die. So if you are 25, then you can take a cover of 35-years which covers you till you turn 60. But if you are 38, then even a 22-year term plan will be sufficient. Shorter the tenure, lower the premium. But if you want to be conservative, you can opt for a slightly longer tenure than what is necessary and just stop paying the premium when the need for insurance is not there. You can refer to this detailed post that I have already written on this topic – How to find the right tenure for the term life insurance policy?
Q6: Term plans are cheap no doubt. But why are online term plans cheaper than offline ones?
A6: When a term plan is purchased online, the costs incurred by the company are less, as there is no middleman between you and the insurance company. This lowering of cost is passed on to you as lower premium as no commission has to be paid to any agent. Most companies offer online versions of their term plans. If you are looking to buy the best online term plan, be sure to do your research and compare across insurance providers and then make the final decision.
Q7: Is the premium of term plans same for everyone?
A7: No. It varies for everyone as it depends on the person’s age, chosen policy tenure, the sum assured, payout method opted for and other premium loadings (if any) due to medical or lifestyle reasons.
Q8: Does the premium of the term plan change during the policy tenure?
A8: No. It remains the same.
Q9: If I die, are there different options in which the sum assured gets paid out to my nominees?
A9: Yes. Insurance companies allow you to chose how the money is paid out to the nominee in case of your death. Suppose you take a term plan of Rs 1 crore. Now if you die, the money can be paid out as any of the following (depending on what you have chosen):
- Full Rs 1 crore paid at the time of death
- Rs 10 lac paid at the time of death. Remaining 90% (i.e. Rs 90 lac) paid out equally as Rs 50,000 monthly (0.5% of sum assured) for next 15 years
- Full Rs 1 crore paid at the time of death. Additionally, Rs 50,000 paid monthly (0.5% of sum assured) for the next 15 years
- Full Rs 1 crore paid at the time of death. Additionally, starting with Rs 50,000 monthly (0.5% of sum assured) and increasing by 10% every year paid out for the next 15 years
- And there can be many other options depending on what the insurance provider is offering at that time.
Obviously, the premiums charged in each variety would be different. Which one should you chose depends on your need. If your nominees know how to manage a large amount to generate regular income, you can go for simple 1st option. But if you feel they are better of receiving money regularly, then probably you can go for 2nd option (or even the 3rd or 4th option which will have higher premiums). You can even have 2 separate policies with different versions chosen for payout in case of death.
Q10: Should I opt regular premium or single premium?
A10: You can choose either. In regular, you pay premiums every year. In single premium, you premium once and never again. But let’s say you buy a 25-year term plan and die after 5th year. Now if you have taken the regular premium route, then you would only have paid 5 small premiums. But if you had opted for the single premium, then you would have paid in one go and that potentially means that the 20 premiums got paid extra as you died early. Nominee gets the same amount irrespective of what you chose. But I think that’s too small an issue to bother about. You can actually do whatever you feel comfortable with. Some people want to just tackle it upfront (via single premium) and be done with it. Others don’t have a lot of surplus money to do it so prefer regular route. Whatever works for the buyer.
Q11: Does it make sense to buy term plans early or I should wait for some time?
A11: The premium amount increases with age. So earlier you buy, better it is. Also, with passing age, it’s possible that you may unluckily develop some disease that might make it difficult to get a policy later on. So don’t wait too long to buy a term plan later on. Buy it as soon as possible even if it seems too early to do so.
Q12: Does the term plan pay out even if I die in an accident?
Q13: Wouldn’t a Rs 10-20 lac term plan cover be enough for me?
A13: No. Don’t be penny-wise pound-foolish. Simply answer this question – If you die today, will your family be able to maintain their lifestyle, pay for children’s higher education, pay off loans and live well for decades to come in just Rs 10-20 lac? The answer will be a big No. So take a plan that takes care of all the above things. You can refer to the earlier mentioned post (about the same question) – How to calculate the right life insurance amount?
Q14: Will Rs 1 crore insurance be sufficient?
A14: Maybe yes. Maybe no. It’s not necessary. Different people will have different optimal insurance coverage requirements. Read this – Is Rs 50 lakh to Rs 1 Crore term insurance enough?
Q15: I want to take a term plan of bigger amount, say Rs 2 crore. Should I split it?
A15: You can do it. But keep it limited to 2-3 policies max. Better limit it to just 2. If you die, your family will have to run around to get all the policies paid out. So think from that perspective.
Q16: What if I am outside India if I die? Will it still pay money to my nominees?
A16: Yes. In most cases. Unless you go and die in a country that is on the unsafe list of the insurance company. So check the list before choosing a country to go and die!
Q17: I want to buy a term plan. But I have a health condition (or family’s health history is odd). Should I hide this information?
A17: Please don’t hide any such information. Death claims can be rejected if the insurance company finds out that you had hidden any critical information. So don’t do it. This may result in slight loading of premiums (increase in premium) that you have to pay. I think that’s much better than having a hanging sword of the possibility of claim rejection in case of death. Be willing to accept the loading of the premiums and move on with it.
Q18: I have few existing insurance policies. Should I disclose them while buying term plans?
A18: Yes. Don’t hide these either. There is nothing bad in having previous insurance policies.
Q19: I have purchased the term insurance. Now what?
A19: Tell your nominees about it. They should be aware of the policy in case you die. Only then they can claim the amount. Isn’t it?
Q20: Anything else?
A20: Stay healthy and try not to die. Your family will get the money if you die. But that’s not an ideal scenario. Isn’t it?
I hope that if you or someone was looking to answer – How to buy the right term life insurance policy? – then they found this article useful.