Time to come to terms

"A person’s liabilities increase with age. So it makes sense to go for an increasing cover plan" —Zankhana Shah, Financial Planner

"You actually lose more than you gain if you go in for a return of premium plan" —Surya Bhatia, Chartered Accountant

When was the last time you saw an advertisement for a term insurance plan? A plan that gives you a very high cover for a very low premium. Chances are, you haven’t seen one for a long long time. That’s because insurance companies are focusing instead on Ulips. An estimated 80% of all new policies sold in the past three years were Ulips. Agents and brokers too are sharply focused on Ulips that earn them a tidy commission instead of the pittance they make from selling term plans.

So, it’s ironical but hardly surprising that even though term plans are considered the best form of life insurance, very few people are aware of them. For the uninitiated, term plans are policies that offer pure life insurance cover without the baggage of investment. Since the policyholder pays only the mortality charges, the premium for a term insurance plan is very low compared to a traditional endowment policy or a Ulip. But a term plan has no maturity value—the policyholder gets nothing at the end of the term.

Term plans have several variants, each catering to a specific need of the customer or his financial circumstances. In some plans, the umbrella gets bigger with time. In others it gets smaller. Some insure you till age 60 while others extend cover till you are 70. Some plans even return the premium to you after the term. Others allow you to switch to traditional plans. Find out which one suits your requirements and your pocket.

Term assurance plan

If you are looking for life insurance cover but do not want to spend a bomb for it, this basic term plan is your best option. It covers the policyholder for a fixed sum during the tenure of the plan. The minimum term is usually five years but it is best to go for the maximum term because buying insurance later can be expensive or outright impossible if you are struck with a medical condition.

In some cases, a person may want to take a big insurance cover for a short period. The Assure Lifeline from Tata AIG Life Insurance has a minimum term of one year while LIC provides cover for a maximum period of two years under its Two-year Temporary Assurance Policy.

Increasing cover

A term plan for Rs 5 lakh seemed adequate when you got married five years ago. Now the stork is on the way and suddenly Rs 5 lakh is looking smaller. Besides, you are planning to take a home loan. And then there are more expenses lined up. You could buy a fresh term plan to cover for every stage of your life. Or you could take a plan that automatically increases the life cover. SBI Life and Aviva Life Insurance offer term plans in which the insurance cover increases with time. Under the Life Shield plan from SBI Life, the cover increases by 5% every year or by 50% every five years. So, if you buy a cover of Rs 10 lakh in 2008, it would grow to Rs 25 lakh by 2023, increasing by Rs 5 lakh every five years. “As a person’s age increases, his liabilities also go up. Therefore, it makes sense for an individual to opt for this plan,” says Zankhana Shah, a Mumbai-based financial planner.

Decreasing cover

You have taken a large home loan and are worried about how your dependents would repay it if something happened to you. For people who don’t have too many assets and are dependent only on their future income to repay big ticket loans, there are loan cover term plans. These plans are linked to the loan and in case the borrower dies, pay the outstanding loan to the financier. As the outstanding progressively comes down, so does the insurance cover. The plan ends after the loan has been fully repaid.

Also known as mortgage cover policies, such plans offer great peace of mind at a small additional cost. Most insurance companies, including LIC, SBI Life, ICICI Prudential Life Insurance, Reliance Life Insurance, Allianz Bajaj Life and HDFC Standard Life Insurance offer such plans to cover loans (Read Insure your loan to know more).

Single premium plan

If you don’t want the hassle of paying the premium every year, there’s also the option of paying at one shot. This is especially suited for people who have a large amount to spare right n o w but are unsure of cash flows in the future. “If the person has spare cash, he should go for a single premium plan. Paying the premium at one shot is better than spreading it for a number of years,” says Ashish Kapur, CEO, Invest Shoppe. The option also lessens the risk of lapse of policy as a result of missed premiums by the insured.

But for a careful spender, a single premium plan holds no attraction, even though they may seem cheaper than a regular annual payment plan. It’s a better idea to invest the money in a safe bond fund or monthly income plan and then withdraw money every year to pay the annual premium of a regular term plan. That way, you don’t have to make a large premium payment upfront. A cover of Rs 10 lakh for 15 years under the single premium option would cost Rs 21,830, while the annual payment option would cost Rs 2,150. Single premium options are offered by most insurance companies but some insurers pitch it as a separate plan altogether.Renewable term insurance

Before they sell you a life insurance plan, life insurance companies make sure that you are fit as a fiddle. You are made to undergo medical tests and any chink in your health armour is immediately noted down as an exclusion. As you grow older, chances of health problems showing up in the medical tests increase. This can push up your premium. Worse, an insurance company may refuse to insure you. But there is something called a renewable term insurance plan under which a policyholder has the right to renew the insurance coverage at the end of the specified term without undergoing a medical examination or providing the insurer with his updated medical history. For instance, the Five-year Renewable and Convertible Plan of Max New York Life gives individuals the option of renewing the coverage every five years. Of course, he will be charged a higher premium because he would be older then.

Financial planners say this option works only for those who are unsure of their liabilities. “It’s always better to go for a long-term plan rather than for a renewal option because every time the person renews the plan, he loses some money in the form of higher premiums. The only advantage is that one doesn’t have to go for any medical test again,” says Zankhana Shah.

Return of premium plans

We all know that term plans are the cheapest form of insurance. But many people are put off by the fact that the premium they pay doesn’t come back. So many insurance companies have restructured term plans where the entire premium paid is returned to the policyholder after the term ends. Sounds great, doesn’t it? Actually, it is not a good idea.

You pay a higher premium than a basic plan and only get the principal premium back without any interest. “People are lured into thinking that they are getting their money back. But you lose more than you gain,” says chartered accountant and investment consultant Surya Bhatia. The table below compares the premium rates for the basic as well as the return of premium term plans. At the end of 15 years, the policyholder gets back Rs 1.57 lakh. But if he opted for a basic term plan and invested the Rs 8,180 in an option that earned him 8% annually, he would have amassed Rs 2.4 lakh.

Other term plans

Want to convert your term plan into a traditional insurance plan? Now, why would anybody want to do that? Still, insurance companies extend this option to policyholders. The policyholder does not have to go through the rigmarole of tests and paperwork. However, this is not a good option. You end up paying a huge sum for the same cover. Then there are plans that are customised for special categories of customers. For instance, the Kotak Preferred Term Plan is targeted at non-smokers and charges a lower premium than the company’s basic term plan. All it requires is an undertaking that the insured person will not use tobacco.

But don’t rush to buy it. It might be cheaper than Kotak’s term plan, but is still costlier than some other basic term plans offered by other companies. For instance, a Rs 15 lakh cover with Kotak Preferred Term Plan for 15 years costs a 30-year-old Rs 4,045 annually. But SBI Life gives the same cover for only Rs 3,150.

The takeaways

That term plans are the best form of insurance is clear. But what is also very clear is that the frills of return of premium, no-smoking discount, or even a one-time premium payment are no good. The basic term plan is perhaps the best option. Besides, the premium matrix changes across companies and age groups. A company’s premium rates may be lowest among all insurers for people under 30 but not in case of people over 40. All insurance companies have premium calculators on their websites and one should compare premiums across several insurers before buying a policy.

Also, instead of one big omnibus policy of Rs 30-45 lakh, it may be better to split the cover into three policies of Rs 10-12 lakh each. It’s costlier, but allows you the freedom to terminate one of the policies if your financial circumstances change in the future.