The very mention of life insurance conjures up images of unpleasant eventualities. But as always, some things in life need to be done, no matter how unpleasant. Life insurance is one such choice, which needs to be exercised. There are various types of insurance plans to suit the needs of individuals. A term plan is one option available at the disposal of the individual, which offers the individual a higher sum assured at a very low cost (premium). Here, we have outlined a few guidelines on what to look for while zeroing in on a term plan.
Tenure
A term plan should always be bought for the maximum possible tenure. This is because the risk an individual faces is directly proportional to his age. Higher the age, higher the risk. Therefore, it is prudent to insure oneself for the maximum tenure available since the premium remains the same throughout the tenure. Otherwise, if one were to buy a term plan at a later age, then it could be a costly affair.
Premium amount
Since one of the reasons for buying a term plan is the lower premium that it offers, individuals should also look at the amount of premium to be paid. They can ideally opt for a term policy from a life insurance company, which offers them the lowest premium for a required sum assured.
The example below would make both the abovementioned point clearer.
Term plan for Ajay from Insurer ABC
| | Age | Term | Sum Assured | Annual | Total premium |
| Case 1 | 25 | 30 | 1,000,000 | 2,500 | 75,000 |
| Case 2 | 25 | 20 | 1,000,000 | 2,200 | 44,000 |
| 45 | 10 | 1,000,000 | 5,514 | 55,140 |
Let’s suppose Ajay, aged 25 years, wants to buy a term plan for Rs 1,000,000. He wants the tenure to be 30 years. The options available to him are-
1. He buys a term plan from company ABC Ltd. for the said amount with tenure of 30 years. As shown in Case 1, the premium in this case works out to be Rs 2,500. The net premium paid by Ajay in 30 yrs is Rs 75,000.
2. Ajay decides to buy a term plan with a tenure of 20 years because the premium works out to be cheaper. He feels he can buy a fresh plan later, at age 45, for 10 years if need be. The premium break up is as given in Case 2. The total premium outgo if this option is exercised is Rs 99,140.
It can be clearly seen from the above illustration that buying a term policy for 30 years at age 25 is more prudent. The premium saved under this option as compared to the other option is Rs 24,140. A tidy sum indeed!
Backdating a policy
Most life insurance companies also allow individuals to backdate a policy. Backdating allows individuals the benefit of an earlier policy commencement date than the day on which the policy was actually bought. This proves to be beneficial if the date of policy commencement falls before his previous birthday. The individual stands to benefit by way of a lower premium outgo due to the premium being calculated on the basis of his previous year’s age.
Some insurance companies also have a minimum ‘floor’ for either the sum assured or the amount of premium. This need not influence individuals even though the options might look attractive. They need to look at their requirements first in terms of risk profile and future needs and then decide on what kind of term plan suits them best.
Individuals also need to look into all the options available to them before buying a policy. For example, some companies offer a separate term plan for non-tobacco users, some companies offer a special rebate for female lives insured. The premiums for such plans work out to be cheaper than those offered on plain-vanilla plans.
Term insurance should form a part of every individual’s financial portfolio. But at the same time, they need to take care to ensure that they get the right product at the right price for the required tenure to secure their family’s future.
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