Choosing the right term insurance policy

How Do You Know Which Policy Is Best For You? Najaf Ishrati Gives You The Lowdown On The Term Policies Available In The Market

September 7, 2005,
ET Personal Finance

THE concept of life insurance and its coverage through various policies has been around for some time now. With 14 registered companies offering a multitude of schemes and policies, singling out a policy can be quite an uphill task.
Insurance products geared towards granting various amounts of financial relief on the loss of a human life, are variations of four basic types of insurance requirements — pure risk, savings, investment, and retirement. Typically, a pure risk cover promises to pay a predetermined sum to the beneficiary, in case the person insured dies within the time period that the policy was taken out for.
On survival of the insured through the term, the insurance company would not pay anything. Premiums, payable at intervals decided by the policyholder, come at the lowest rates for these types of schemes. In the other varieties, the insurer guarantees some payment even on survival.
ET zooms in on the pure risk or ‘term’ policies. These are available to people who have attained a certain minimum age, mostly 18. The age up to which term insurance can be availed, or the maximum entry age, is generally between 50-60 years, depending on the insurer. Six companies offer protection even to those aged 60.
In addition, companies maintain minimum and maximum term periods, over which policies can be underwritten. It is seen that companies mostly prefer a minimum term of five years, with two companies — ING Vysya and Kotak Mahindra OM — reserving a minimum
cover period of 10 years. On the maximum duration front, term periods of 25, 30, 40 and 42 (up to age 60 plans) are seen.
The insurance business is nothing without variables. These days, a policyholder can insure himself with amounts (sum assured) large enough to send his family to the moon and back, provided he can pay the premiums. Normal sums assured, however, are decided depending on the financial requirements or obligations of family or oneself. It is in this area, that most companies differ. While seven companies offer a ‘no upper limit’ policy, others provide a ceiling, the lowest being the Rs 10 lakh offered by Bajaj Allianz.
All the policies converge is in the area of the minimum sum assured, or the minimum face value that the company is willing to underwrite a policy for. Companies have minimum premium receivable guidelines also, below which policies are not undertaken. While the minimum sum assured range from Rs 25,000 (HDFC Std Life) to Rs 500,000 (LIC, Aviva), the minimum annual premiums are pegged from Rs 1,000 (Sanmar) to Rs 2,500 (Vysya).
What makes these schemes all so attractive, are the rate of premiums. A healthy 35-year-old male, insured for an amount of Rs 500,000 for a term of 20 years, would pay annual premiums in the range of Rs 1,865 (HDFC Std life) to Rs 3,747 (Allianz Bajaj), depending on the company he partners with, although the mean for this classification stands at Rs 2,524 per year. ICICI’s minimum premium requirement of Rs 2,400 excludes it from this comparison, as the rate at which it calculates its premiums pegs the amount at below this level.
A few companies have plans with reduced premium rates, but require a minimum sum assured of a significantly higher amount. For instance, using the above illustration, while altering only the sum assured to Rs 10 lakh, Kotak’s Preferred Term Plan requires a yearly contribution of only Rs 3,400. These low premiums start to look far more attractive when compared with premiums of policies where you get your money back — which would be around 24,000 per year for the same conditions.
Then there are riders on these policies. Most policies come with add-on benefits for a small increase in the premium price. These could be accidental death or disability covers, premium waivers in case of earning incapacity, or plain-vanilla hospitalisation expenses.
For instance, Vysya’s ‘Conquering Life’ comes with an inbuilt critical illness plan, which covers expenses incurred on 10 pre-specified illnesses, apart from the regular life insurance, thereby explaining its higher premium price.
Term policies work for those who feel the need to insure themselves up to a certain age, but don’t want too much bother with high premiums. Most policies promise to have that little bit extra on offer, which the potential policyholder must scrutinise before approval.