Due to the mis-selling prevalent in the insurance industry, many individuals are saddled with policies that provide them with an insurance cover at a relatively higher cost. Insurance seekers are rarely informed about term plans which can help them obtain an insurance cover at a lower cost.
Term Plans
A term plan provides financial security to the nominees of the insured, in the event of him meeting with an eventuality. The sum assured is payable if the insured's death occurs during the tenure of the policy. Conversely, no payment is made if the insured survives the tenure.
Since term plans do not offer maturity benefits (i.e. there is no savings element), premiums are lower. This is what makes them the cheapest form of life insurance vis-a-vis others like endowment plans and unit linked insurance plans.
The latter offer a return either on the insured's death or in event of maturity of the policy. Since term plans are not burdened with the cost of providing a return (which means that nearly the entire premium goes towards providing risk cover), term plan premiums are relatively low.
For individuals, who don't necessarily want a return from their insurance plan, term plans are an ideal way to insure themselves for a higher sum assured at a relatively affordable premium. However in most cases, insurance seekers desire a return on their insurance plans. To achieve this, they are even willing to pay a higher premium and settle for a lower risk cover. This scenario suits unscrupulous insurance agents just fine since they make higher commission earnings on endowment plans than term plans.
In this article, we profile an innovative term plan - SBI Life Shield Plan which should appeal to insurance seekers looking for a pure risk cover.
SBI Life Shield Plan
Like all term plans, Shield Plan offers tax benefits under Sections 80C (on premium payments) and Section 10(10D), on the maturity proceeds. More importantly, it offers some interesting options, which is more than what one can say for most term plans.
First option: Increase in sum assured by 5 per cent every year
Under this option, the basic sum assured increases by 5 per cent (of original sum assured) every year. In case of the insured's death during the tenure of the policy, the nominee will receive the enhanced sum assured. The increased sum assured is calculated taking into account the number of completed policy years.
Second option: Increase in sum assured by 50 per cent every 5 years
Under the second option, the basic sum assured increases by 50 per cent (of original sum assured) every 5th policy year.
Third option: Regular level cover
Under the third option, the sum assured remains constant throughout the tenure of the policy.
An illustration should help us better understand the same. The table shows the varying insurance cover (sum assured) under different options over a 10-Yr policy tenure, assuming that the sum assured at the commencement is Rs 500,000.
Insurance Cover: Changing with the times
| Sum Assured (Rs) | |||
| Policy Year |
Level Cover |
Rises by 5% per annum |
Rises by 50% every 5 years |
| 1 | 500,000 | 500,000 | 500,000 |
| 2 | 500,000 | 525,000 | 500,000 |
| 3 | 500,000 | 550,000 | 500,000 |
| 4 | 500,000 | 575,000 | 500,000 |
| 5 | 500,000 | 600,000 | 500,000 |
| 6 | 500,000 | 625,000 | 750,000 |
| 7 | 500,000 | 650,000 | 750,000 |
| 8 | 500,000 | 675,000 | 750,000 |
| 9 | 500,000 | 700,000 | 750,000 |
| 10 | 500,000 | 725,000 | 750,000 |
The table below shows indicative premiums under the 3 options. It has been assumed that the policy has been issued to a healthy, male individual for a term of 25 years; premium payments are made annually for a sum assured of Rs 500,000.
Annual Premium Payments
| Annual premiums (Rs) | |||
| Age of entry |
Level Cover |
SA rises by 5% per annum |
SA rises by 50% every 5 years |
| 18 | 1,083 | 1,353 | 1,588 |
| 20 | 1,083 | 1,441 | 1,706 |
| 25 | 1,240 | 1,804 | 2,191 |
| 30 | 1,632 | 2,534 | 3,166 |
| 35 | 2,338 | 3,778 | 4,807 |
| 40 | 3,475 | 5,738 | 7,355 |
An interesting aspect of the policy is that in each of the options, the premium remains constant throughout the term of the policy. The varying premiums across options are on account of an increase in sum assured (under the 5% and 50% life cover enhancement options) over the policy term.
Despite the higher initial cash outflows under the increasing sum assured options, the same would prove more cost-effective vis-à-vis an individual opting for higher insurance cover at comparable time intervals. In other words, if an insurance seeker were to opt for additional insurance cover to match the one offered under the increasing sum assured options, he would end up paying a higher premium as compared to the one under the increasing sum assured option.
The enhanced sum assured option can prove to be particularly useful because opting for insurance is not a one-time activity. Ideally, individuals must regularly assess their insurance needs in light of lifestyle changes and increase in liabilities/responsibilities, among other factors.
In such a scenario, it would be convenient to have a term plan that enhances the life cover at regular intervals, rather than opting for a new term plan every time the human life value is reassessed. Also the constant premium payments, makes it easy to plan one's finances.
At Personalfn, we have always maintained that a financial planner/advisor has a vital role to play in aiding individuals achieve their financial goals and objectives. Insurance plays a vital role in the financial planning exercise. Individuals would do well to consult their insurance advisor to determine the suitability of any insurance plan and then make an investment decision.
Buy Personalfn.com, a financial planning initiative. It can be reached at info@personalfn.com. Personalfn.com also publishes a free-to-download financial planning guide, Money Simplified. To get a copy of the latest issue - How ULIPs fit in - please click here.
