TERM INSURANCE:THE BEST INSURANCE

 

Term insurance plan or a term insurance policy is a life insurance product that guarantees payout to the nominees or legal heirs upon the death of the insured (even due to COVID-19) if it happens within the policy term chosen at the time of owning term insurance.

Term Insurance is a product designed to provide a measure of protection financially. It’s the contract between Insurer and Insured.

Term insurance is purely for risk management. It is not an investment product. In insurance, an insurance company (referred to as the Insurer) promises to pay, to the owner (Insured) or a beneficiary of an asset, a certain amount (Sum-Assured), if a loss occurs, so that, they may try to ensure the continuance of the financial benefits. 

The insured pays a certain amount called consideration, to the Insurance company, for bearing the Risk, which is known as, Premium.

Term insurance is called term insurance because it is taken for a limited time. If a person took life insurance for his whole life (it’s generally 100 years) then it is called whole life insurance.

Suppose if a person at age 30 years had taken insurance for the next 40 years. Now his life insured for the next 40 years. If he dies within the next 40 years then his nominees or legal heir will receive the payout. That is why it’s called ‘Term’ insurance because it is taken for a specified time.

But if he dies after completing the next 40-year policy term or live beyond the specified term, then no payout will receive to his nominees or legal heirs. 

Now we will understand the whole philosophy of term insurance with the 5W+1H approach.

This 5W+1H are

• What

• Why

• When

• Which

• Where

• How

# What is Term Insurance?

As we already discussed above what is term insurance, but term insurance comes with different plans. So let’s discuss:-

Level Term Plan: 

This is the simplest form of Term Insurance as in this sum assured does not change with tenure and benefits paid to family only on the death of the insured within a specified policy term.

Return of Premium plan: 

This type of Term Insurance comes with the feature if the policyholder survives till the maturity of the policy term then the insurance company will give premiums paid back to the policyholder after deducting the taxes applicable on maturity time. Personally don’t recommend this feature. 

Let’s understand this with a simple example

Here we are considering a non-smoking person whose age is 30 yr, wants to take term insurance cover of one crore for the next 40 years.

He has two plans.

1. Level Term Insurance plan

2. Return of Premium Term Insurance plan.

But why he should go with ‘Level’ Term Insurance Plan rather than ‘Return of Premium’ Term Insurance.

Let’s understand this with the below-mentioned illustration.

Here we are considering two options.

Option A: Level Term Insurance.

Option B: Return of Premium Term Insurance.

If he goes with option ‘B’ then will get back approx. Rs.8,00,000/- at time of maturity if survive till then. 

Now if goes with option ‘A’ but put the ‘difference of premium’ amount in a suitable investment vehicle which gives 8% interest. 

He will get back approx Rs.18 lacs at maturity.

Now you should decide which option is better to get 8 lacs or 18 lacs back because in both cases you are getting the same insurance coverage.

If a person dies during the tenure of the policy term, beneficiaries of a person with option ‘B’ will get back only the sum assured of one crore but with option ‘A’ will get back investment value at that time along with the sum assured of one crore.

Increasing Term Plans: 

In this plan, one can opt to increase the sum assured at annual frequency during the policy term while keeping the premium the same. No doubt the premiums of this plan will differ from level term plans.

Decreasing Term Plans: 

In this plan, the sum assured decreases year after year to match the decreasing insurance needs of the policyholders. 

These plans mostly have taken, when someone has taken a large amount of loan for a home or personal needs and paying an equated monthly installment, or EMI. 

The sum assured decreases with chosen frequency as and when EMIs are paid out and the total loan amount keeps decreasing. 

Convertible Term Plans: 

This type of term insurance plan can be taken to convert it into some other plan of your choice at future date. 

Suppose if you have taken your term insurance for 40 years but after 5 years you can convert this into a whole life insurance plan, endowment plan, or any other plan of your choice. 

This type of plan is offered by some Insurance companies wherein you can opt for this if you so wish.

Term Plan with Riders: 

In this type of plan you can buy riders like, critical illness cover, accidental death cover, or disability cover, etc by paying a small additional premium amount.

If you have taken an accidental death benefit rider, then in case of accidental death, the beneficiary will get an additional amount along with the sum assured.

#Why Term Insurance is important?

We know that one day we will die. It may be sooner or later but die. In that condition, the two-loss will happen to our families

• Emotional Loss

• Financial Loss

The emotional loss can’t be compensated at any cost to our families.

But financial loss can be compensated if one has taken insurance.  

We should buy insurance if anyone depends on & requires us for financial support like our families, kids.

 

But if you don’t have anyone who depends upon you or doesn’t require you for any financial support then no need to buy it. 

Now let’s understand with a simple example. 

As a person who is the sole breadwinner for his family, he has a lovely wife & kids, has property on mortgage & other personal loans.

Now if a person dies without life insurance on one unfortunate day, then his property on a mortgage might be taken away by creditors, his family & kids will suffer as he was the only breadwinner for his family. 

Creditors will create a nuisance to your families for personal loan recovery if any left.

The education of your children could suffer if they are studying in school or college and requires immediate funds.

Whether all these problems can be averted if a person has life insurance? …definitely YES

Because in the case of death, the insurance company will give a sum assured to his family. This sum assured would be sufficient to pay off a mortgage loan, family expenses, & protection from creditors.

So you can see why term insurance is important.

# When Term Insurance should buy? 

The term insurance should buy as you start your earning or someone requires you for your financial support like family & kids. 

The term insurance should be taken at an early age rather than later age because it’s much cheaper at an early age. Secondly, the premium amount will remain the same throughout the policy premium term, which is one more additional benefit because with increasing age our salary would grow but premiums will remain the same.

# Which Companies’ Term Insurance is better?

Ideally, any company is better which gives back the sum assured to the beneficiaries without any hassle. But is it happens?

To measure the stability & performance of any insurance company, there are two ratios widely used. One should focus on these two ratios rather than the premium amount as term insurance is long term contract between Insurer & Insured. 

These two ratios are

Claim Settlement Ratio (CSR): 

The claim settlement ratio is simply the number of claims settled per total number of claims received in a year. Assume a company has a claim settlement ratio is 95%. It means the company settled 95 out of 100 claims irrespective of the value of claims.

But this ratio does not tell the whole story of any insurance company. Let’s understand with a simple example.

Suppose a XYZ insurance company received 99 claims of Rs.1,00,000 each & 1 claim of Rs.1,00,00,000/-. Hence a company received a total of 100 claims in a financial year.

Now this company settled the 99 claims of Rs.1,00,000/- each but ignored one claim of Rs.1,00,00,000/-

Although as per the claim settlement ratio the insurance company has a 99% claim settlement ratio. But is it a healthy sign of an Insurance company?… not

Because sometimes to increase the claim settlement ratio, insurance companies used to settle low value but ignore high-value sum assured. 

Most insurance agents claim high settlement ratio of their companies while selling their products, but ignore the other ratio which completes the whole story & this ratio called ‘Incurred claim settlement ratio’

Incurred claim settlement ratio (ICR): 

The incurred claim ratio is the ratio of ‘total value of claims settled’ by an insurer to the ‘total value of premiums collected’ by the insurance company in a given year.

This ratio shows the trustworthiness of an Insurance company.

Suppose an insurance company has 75% ICR, it means for every Rs.100 of premium collected, the company is paying Rs.75 towards claim settlement & rest 25% is a profit of a company.

If ICR>100%

It implies that the total value of claims settled is more than the total value of premiums collected.

It means a company making losses and hard to sustain & grow in the market place. Such companies are more likely to reject the borderline claims & can change their products to sustain. It’s not a healthy sign of an insurance company.

If 50%<ICR<100%

It implies an insurance company making a profit, has built a good product, educates their customers when to make claims & when not.

If ICR<50%

It implies an Insurance company making a huge profit by either charging high premiums or it is rejecting claims. So these both things we don’t want.

Generally, these ratios can be taken from companies and/or the IRDA website by searching the below-mentioned line.

* (INDIVIDUAL DEATH CLAIMS FOR THE YEAR 2018-19)

So first check all these ratios then finalize which insurance company is better.  

# Where to buy Term Insurance?: 

There is no right answer to this question. Some people prefer to buy online & some buy offline. But still, we have some criteria upon which we can finalize it in our way.

If you are internet savvy & your family has good knowledge of how to settle claim then you can go for an online system. Because at that time no one would be available to help your families except the internet. 

But don’t believe blindly on a person who is filling your insurance form online. You will never be able to get in touch with that person if any wrong information he has filled after that.

If you don’t know who will be available to help your families in case of claim settlement or don’t know the internet then you should go with an offline system i.e. through insurance agents.

But two things you should always keep in mind, first the insurance agent should be honest with you, and the second thing is he should be at lower or equivalent age from your age. 

If an insurance agent who is already at the age of 65 or 70 & did the insurance of a young person for the next 50 year. 

It’s a very rare chance insurance agent would be available to help for claim settlement until he has his succession plan.

Generally, a person should go for online insurance, if it’s for a short time like motor vehicle insurance. But if insurance contract time is more than five years then should go with an offline system.

# How much term insurance should buy?:

It’s a very important question about how much term insurance should buy. Generally, people buy the term insurance without considering the actual cover required. 

Sometimes people buy the under-cover sum assured to reduce their premium cost & sometimes over-cover without considering actual risk, pays high premiums. 

Although there are specific calculations to reach on the actual cover required.

But as a thumb rule, it should be ten times your annual income. 

Is it the right answer…No…But it’s rule of thumb.

For example how much water should you drink in a day?

Ideally, the rule of thumb 6-8 glasses or 2 liters per day. But it would vary from person to person.

If someone lives in the desert, he requires more water.

If someone perspires too much, work out too much, he requires more water.

So to reach on the right sum assured & tenure, take the help of a financial planner.

Conclusion

We go through every aspect of the term insurance plan & praise it.

But who are still wondering why am I praising the term insurance plan so much; let me tell you that a term insurance plan is the only risk management tool through which you can entirely protect your family’s financial well-being in your absence. 

The price of this cause is very small as the premium of term insurance plan is cheapest amongst all life insurance plans.