Understanding Term Insurance:
Term Insurance is a plain life insurance plan. It is the simplest and most fundamental death benefit plan without any money back or maturity benefits. The Term insurance product is designed for a specified term (between 5-30 years) and provides benefit to the beneficiary if the policyholder dies during the covered term. Financial experts believe that it is the best way of insuring since the annual premium of term plan is very low and the sum assured (death coverage) is very high in comparison to any other insurance plans.
How is it different from other insurance plans like endowment, ULIP etc.?
It is not an investment plan. This plan is designed purely to safeguard your family’s financial protection in case of your sudden demise. Following points can help you to better understand the difference between term insurance and other insurance plans:
| Term Plan | Other Regular Insurance Plans | |
| Insurance or investment? | This is a pure Life Insurance plan | Others are generally life insurance plus savings or investment plans |
| Benefits during life | It provides death benefit to the beneficiary only when the policy holder dies during the specified term. No money back in case the policy holder is alive at the end of the policy term | Other plans provide the death benefit (but very less cover in comparison to term plan) along with savings in case the policy holder is alive |
| Maturity Benefits | The policy holder does not get any maturity benefits. The annual premium paid, is purely used for covering the risk. No benefits are paid on survival to the end of the term of the policy. | Most of the other plans provide some return on the investment (although not guaranteed in most of the policy type) in form of money back, retirement benefits, child education etc. |
| Cost of Acquisition | This is the least expensive plan that provides the maximum cover to the beneficiary i.e. less premium with maximum benefits in case of death. | As these insurance plans are linked to several investments, so on the one hand, policy holder has to shell out extra premium to cover the cost of investment. And on the other hand, the life cover provided in these kind of policies is extremely less in comparison to the term plans. |
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What is an ideal life insurance cover?
Many insurance providers make use of calculators to know Human Life Value (HLV). It provides the worth of your life in monetary terms. It determines your Life Insurance needs on the basis of various factors like Income, Expenses, Liabilities and Investments. An ideal HLV calculator takes into consideration the following factors before calculating your life cover:
- Annual income required by your dependents in case of your death (excluding any other source of income, if any)
- Inflation rate: Assuming an inflation rate of 7% p.a., the value of Rs 10 lacs will be 3.63 lacs after 15 years
- Present value of all your investments
- Expected return on investment (%)
- Number of years that you want to provide income to your family
- Any outstanding loans that your family would have to repay
Example: Let us consider a scenario wherein Mr. Arpit Gupta aged 30 years, Software Engineer is the breadwinner of his family. He is looking for a Term Insurance Plan and needs to know the ideal life cover that he should opt and the approximate premium that he needs to pay for the same.
Now, before deciding on the life cover, it is also important to consider the inflation rate, present value of his income after 30 years (assuming that he retires at 60 years of his age) and the outstanding balance of loans that he availed and would be paid by his family members in case he dies. Let us assume his monthly income, expenses etc. as follows:
| Expected Retirement Age | 60 years | |
| Inflation Rate | 5% | |
| Return on Investment | 10% | |
| Net Monthly Income | 60,000 | |
| Monthly Expenses | 45,000 | |
| Current Liabilities Amount (This is the amount outstanding against you e.g. housing loan, personal loan, credit card outstanding balance etc.) | 15,00,000 | |
| Estimated life value of Arpit Gupta | 1.02 crores |
Based on the above factors, the estimated life value of Arpit Gupta is Rs 1.02 crores (considering the future value of his income, expenses, investment and liability after factoring inflation rate of 5%).The Human Life Value (HLV) Calculator that is easily available on the internet can be used to find out the Life Value of Arpit Gupta in monetary terms.
HLV is nothing but the numeric way to know the ideal life cover. An individual’s HLV is typically expressed in terms of multiple of his or her annual income. Other than the method shown above (the inflation and present value of money), some insurance providers consider a simple way to calculate the HLV. The following table gives an approximate HLV (on the lower side) multiple for different age bands without factoring the liabilities of an individual:
| Age Band | HLV Factor* | Age Band | HLV Factor* |
| 18-24 | 6 | 45-49 | 10 |
| 25-29 | 8 | 50-54 | 8 |
| 30-34 | 10 | 55-64 | 6 |
| 35-44 | 12 | 65-75 | 4 |
*Please note that the above HLV factor is only indicative and does not consider the liabilities of an individual. The policyholder should consult his insurance provider to check the actual cover provided.
Additional Benefits (Add-on/ Flexibilities/ Riders)
So as to distinguish the contemporary Term Plan from the traditional pure risk cover plan, the insurance providers are offering several flexibilities to the Term Plan.
Some of the Flexibilities and Add-ons offered by the insurance providers are:
- Flexibility to opt for a single life or joint life basis (first claim)
- The flexibility to choose the premium payment frequency i.e. quarterly/half-yearly/annual.
- Choose your sum assured and plan option (Level term/ increasing term)
| Level Term Assurance – Your sum assured will remain constant for the entire policy term. Increasing Term Assurance – Every year, your sum assured will increase by 5% or 10% of the original sum assured without any increase in your premium amount. | |
Critical Illness benefit- Under this option an amount equal to sum assured is paid on diagnosis of 6 pre-specified critical illnesses.
Accidental Death Benefit– Under this option an additional amount equal to the sum assured is paid in case of death by accident
Eligibility Criteria:
| Entry Age | 18-55 years |
| Policy term | 5 to 30 years |
| Maximum age at expiry | 65 years (some policy providers extend it upto 80 years) |
Important Factors to consider before selecting a Term Plan:
Life insurance is generally bought to take care of the financial needs of your dependents. Hence, it is important to choose your insurer with utmost care. Before selecting a policy, you should not only check the annual premium and the sum assured, but should also check for a claim settlement ratio of the Insurance provider to know the past record of performance during clearing the settlement claim. So, let us understand the concept of Claim Settlement Ratio.
Claim Settlement ratio: The Claim settlements ratio indicates the proportion of claims that have been honored out of total claims that are outstanding. Higher claim settlements ratio, better it is because it indicates that a life insurance company is making the payments when they fall due, in this case an untimely death.
Below is a table and Chart that shows the top 10 insurance providers in India by the Claim Settlement Ratio in decreasing order:
| S. no. | Insurance Provider | Claim Settlement Ratio (2011-12) |
| 1 | LIC | 97.70% |
| 2 | ICICI Prudential | 96.30% |
| 3 | HDFC Life | 95.80% |
| 4 | SBI life | 94.40% |
| 5 | Max life | 94.30% |
| 6 | Kotak life | 92.00% |
| 7 | Star-Union Dai-ichi | 89.70% |
| 8 | Bharti Axa | 89.50% |
| 9 | Bajaj Allianz | 88.70% |
| 10 | Canara HSBC | 88.40% |
Source: IRDA annual report 2012-13 available at irda.gov.in. All figures are rounded off to the nearest integer%
In an increasingly uncertain world, it is your top priority to ensure that your family continues to enjoy financial security and a comfortable lifestyle even in your absence. The term insurance is a simple and economic way of achieving this objective irrespective of what the future has in store for you. Your life responsibilities might either be escalated or have been steady. Always protect your family against the extra liabilities of life by choosing the plan option that is best suitable for your needs.