Friday, March 27, 2009

Term Insurance

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A pure term plan ideal for insurance cover
23 Mar 2009, 0533 hrs IST, Bakul Chugan Tongia, ET Bureau

Investment and insurance should never be a part of a single basket. While an investor has a plethora of options to choose from when it comes to investments, a pure term plan is an ideal play for buying an insurance cover. Low premiums and high insurance cover is what defines an ideal insurance plan. And a term plan gives just that.

But even within the basket of term plans, choosing the right scheme is no longer easy. Given the increasing number of insurance players in the country today and their habit of launching schemes aplenty, investors are often left scratching their heads in confusion. If not, the decisions are left to the whims and fancies of the insurance agents who would suggest a plan that earns them the highest commission.

There are many criteria that may be considered for selecting a term plan. However, premium charges are the predominant factor. Different insurers have different premium charges for their policies and one has to select the one which is most economical to the pocket. Moreover, most insurers have the option to pay premiums either periodically - throughout the term of the policy or for a limited period, as the case may be - or a single premium at the time of taking the policy. While a single premium may, prima facie, appear more economical in absolute terms, an analysis on the basis of the current value of total premiums paid under a regular plan reveals otherwise. Not all single premium plans are healthy to the pocket. A regular plan may turn out to be a far more economical deal for some insurers. (See Table) (For the detailed version, log on to

Investors may however do well to note that the most economical insurer at a particular age bracket may not be as economical in some other age bracket. It is therefore advisable to check the premium rates of insurers for different age brackets before zeroing in on the right scheme.

Term plans are designed to financially support the family of the insured. They simply cover the life of the policy holder (insured) and do not provide any maturity or survival benefits. Nor do these schemes participate in the profits of the insurance company. The sum for which the life cover is taken (sum assured) is payable only to the nominee of the insured in case of unfortunate demise of the insured during the term of the policy. Where the insurer survives the policy term, he/she is not entitled to any benefits from the insurance company. The premiums paid throughout the policy term may thus be treated as a cost to cover one’s life. It is for this reason that the premiums charged by a pure term plan are far lower vis-à-vis any endowment or money back policy.

It is advisable to start a term plan early in life. At the same time, it is important to ensure that it covers life for as long a period as possible. Most insurers provide life cover for a maximum period of 25 to 30 years. The maximum age at maturity is usually pegged at 60-65 years. However, some insurers provide cover for a larger number of years and others have a higher maturity age. Kotak Mahindra, for example, has a maximum maturity age of 70 years, while ING has pegged its maximum maturity age at 75 years. Bajaj Allianz, on the other hand, provides life cover for a maximum of 40 years, while Sahara has the lowest term cover of 20 years.

The minimum sum assured (MSA) is also an important criterion. The amount of MSA ranges from a low of Rs 50,000 to as high as Rs 10 lakh. The investor has the option of choosing the insurer whose policy conveniently fits the bill.

While the term plans do not provide any maturity benefits per se, insurance companies do offer term plans that promise to return the premiums paid at the end of the policy term. These policies are in fact just like any other money-back plans with relatively higher premium charges vis-à-vis pure term plans. Investors may therefore do well to invest their money in profitable ventures rather than pay high premiums for insuring their lives, which can be done rather economically through pure term plans.

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