If you just want a life insurance cover with no frills, then, you should go for a term plan. This is perhaps the cheapest among all insurance covers. So, what is a term insurance plan? A term insurance cover is a vanilla or basic insurance policy that pays a lump sum to the policyholder’s family in the unfortunate event that the policyholder is no more. Term plans give you the flexibility of opting for a lump sum or monthly payments. This is based on the terms and conditions of the policy.
But why is it called term insurance? This is because the cover is offered for a particular term or number of years. The policy term usually starts from five years and can go up to 40 years.
What does the plan cover?
As mentioned earlier, the policy will cover the death of the policyholder. Some policies also cover permanent disability and partial disability of the policyholder. Some plans pay out a lump sum in case of critical illness and disability.
Is the premium low?
Since a term plan is a basic cover, the premium is much lower. The annual premiums for term insurance policies start from Rs 4,000 per year, which works out to Rs 12 per day. You can choose to pay the premium as a lump sum for the whole term. Insurers offer discounts in this case. You can make the annual payment or you can choose to pay the premium using monthly instalments. In case of monthly instalments, the premium might be slightly higher. Half-yearly and quarterly payments are also allowed by certain insurers.
How to choose a term plan?
When you are going for a term plan, there are two important factors that you should look at. One pertains to the insurer and the other to the policy.
Claim Settlement Ratio
The first thing you need to look at is the insurer’s claim settlement ratio. When you buy an insurance policy, you want your claims to be settled quickly and without any hassles. For this, you have to understand the insurer’s claim settlement history. The insurer should have settled all the genuine claims quickly. There are two ways to find this. One is by looking at the claim settlement ratio and the other is by talking to customers who already have a policy with the insurer.
Where to get the data on claim settlements? The Insurance Regulatory and Development Authority of India (IRDAI)’s annual report every year gives all the details regarding which insurer settled the most number of claims. Claim settlement ratio will also be given. This is the ratio of the number of claims settled to the number of claims filed. A claim settlement ratio of over 90% is good.
The report for 2016-17 shows that private sector insurers settled an average of 93% of the claims. Note that it was 88% way back in 2013. LIC had had the highest claim settlement ratio among insurers for many years now. In 2016-17 also they had the highest claim settlement ratio of 98%. Here’s a list of the top five insurers in terms of their claim settlement ratio.
|Insurance company||Claim settlement ratio|
*Source: IRDA’s annual report for 2016-17
Coming to the second point. You can read reviews online and also speak to customers of the insurer to see how quick the claim settlement process actually is. You also should ask questions in case some claims were rejected.
The right sum assured
Choosing the right sum assured for your family is very important, especially if you are a single earning member. Experts recommend that your life cover should be 10-20 times your annual salary. For example, if your annual income is Rs 5 lakh, your insurance cover should be at least Rs 50 lakh. Rs.1 crore might seem like a good cover but you have to check your income to understand if it is sufficient. Before deciding on the sum assured, look at your income, the number of dependents and your liabilities. The more the liabilities, the higher the cover that you should look at.
You can go for a joint life cover in case both you and spouse are earning. This could help you get a better cover for a lower premium. You can also look at riders such as critical illness rider, hospitalisation rider and disability rider, in case these are not covered by your term plan.