A term policy is a cheaper way to cover your life and is tax-efficient while the investible surplus can yield better returns elsewhere.
If you have been wondering whether or not to get yourself insured and what kind of policy you should choose, the following should help you decide.
To begin with let's take a look at the simplest of all life insurance policies -- a term plan. Term insurance policy is the most basic type of life insurance cover available and is also the cheapest.
| Age | 30 | 40 | 50 | 30 | 40 | ||
| Tenure (years) | 10 | 10 | 10 | 20 | 20 | ||
| Term policy | Rs/p.a. | Rs/p.a. | Rs/p.a. | Rs/p.a. | Rs/p.a. | ||
| Om Kotak Preferred Term Plan | 2400 | 3900 | 8330 | 2500 | 4900 | ||
| ICICI Pru Life Guard | 2751 | 3917 | 7964 | 2751 | 5014 | ||
| HDFC Standard Term Assurance Plan | 2820 | 3840 | 8320 | 2920 | 5110 | ||
| Birla Sun Life Term Plan | 2950 | 4310 | 8790 | 3010 | 5150 | ||
| Tata AIG Assure Lifeline Plan | 2320 | 4070 | 9260 | 2790 | 5310 | ||
| SBI Life Shield | 2042 | 3542 | 8814 | 2454 | 5384 | ||
| Max New York Life Level Term Policy | 2280 | 4160 | 10000 | 2710 | 5650 | ||
| Aviva Life Lifeshield | 2660 | 4220 | 9230 | 3120 | 5840 | ||
| LIC Anmol Jeevan | 2564 | 4702 | 11335 | 3227 | 6940 | ||
| Allianz Bajaj Risk Care | 3560 | 6100 | 13610 | 4830 | 9850 | ||
A term policy covers your life and provides your nominee a 'sum assured' (pre-determined sum of money which is the policy amount) in case of death of the insured. But no amount is refunded on survival of the policyholder.
The primary reason for taking this policy is to ensure that your dependents do not face any financial crisis in the event of your death. Select a policy after counting your liabilities and the number of dependents.
This type of cover is available for a fixed tenure, usually upto a maximum of 25 years, depending on your age when buying the cover and it involves a payment of level premium (same premium amount throughout the tenure) during the duration of the policy.
Premia paid on life insurance policies are eligible for benefits under section 88 of the Income Tax Act wherein on a taxable income of Rs 150,000 or less per annum there is a rebate of 20 per cent on the premium paid. If income is between Rs 150,000 to Rs 500,000, there is a rebate of 15 per cent. Taxable income above Rs 500,000 is not eligible for any rebate
Why term?
One argument against term policies is that there are no benefits on survival. True. But the point to be noted here is that term policies are the cheapest among all life insurance policies available.
Endowment plans typically have premia that are much higher than a term policy with the same sum assured at the end of the tenure. The way out is to get a term policy and invest the excess into other investment avenues, which will yield higher returns -- like a PPF or a mutual fund.
For instance, an endowment for 20 years for Rs 100,000 would mean a premium of Rs 2,938 per annum.
On the other hand, if you took a Rs 100,000 term policy for 20 years at Rs 250 per annum and invested the rest (Rs 2,688) in another investment (say PPF, yielding 8 per cent) then the compounded value here would be over Rs 120,000. The second option covers you for the same amount while generating excess return.
Do not settle it once and for all
Apart from regular premium payments, you have another option, which involves a one-time payment of premium on purchase of the policy.
However, one-time payments may work out slightly more expensive than regular payments, when discounted at future values.
For instance, a policy of Rs 500,000 for 10 years has an annual premium of Rs 1,140 against a single premium of Rs 8,200, and in case of the single premium you effectively end up paying about 2.5 per cent more (the net present value of Rs 1,140 for 10 years works out cheaper than the single premium).
Similarly, if you have a longer-term tenure, say 20 years for the same sum assured, you would effectively pay 7 per cent more than your annual premium of Rs 1,528.
Moreover, the catch with single premium policies is that if you are to expire in between your tenure, the rest of the premium paid for the remaining tenure is not refundable!
Not just plain vanilla
Despite its apparent lack of frills, term policies do come with several riders. Riders are additional benefits you can get on events like accidents, disability and critical illnesses.
In case of a critical illness, for instance, premiums paid will be eligible for deduction under section 80 (D), which covers medical insurance. Usually these riders can be availed of at a marginal premium and every policy comes with a differential structure of riders.
Default in payment of premium
Insurers usually offer a grace period of 30 days in case of non-payment of premium. After this interest (a nominal rate) on the premium due is calculated and the policyholder will have to pay this extra amount to restart the policy.
However, this cannot be done for the entire term. Insurance companies usually allow the extension of non-payment for about two years (varies marginally across various insurers). If the premium is not paid even after these two years, then the policy lapses and you will need to take a new one.
If you are planning to pick a term policy, it may be advisable to go in for the one with the cheapest premium. But look out for the riders.