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 the answer to my
question “what is the best time to buy a term insurance policy” is NOW - you need to take the term policy 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:
- If you are up to 25 years of age – take a cover of 20 times your annual
pre-tax income
- If you are between 25 years and 35 years old – take a cover of 15
times your annual pre-tax income
- If you are between 35 years and 45 years old – take a cover of 12
times your annual pre-tax income
- 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
|
Age
|
30
|
35
|
40
|
45
|
50
|
Insurance policy
|
|
|
|
|
|
LIC eTerm
|
16400
|
20100
|
25000
|
32300
|
41000
|
HDFC Click2protect
|
13500
|
16000
|
20500
|
28500
|
41000
|
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)
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%.
So to answer the question raised above? – Well I guess you have the
answer already J
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