Term insurance is the pure life insurance in which the insurance company provides the full sum assured in case of death of the policyholder before the maturity ends. If the policyholder lives beyond the period stated in the policy, no payment is to be made by the insurance company.
When buying a term insurance policy, it's important to consider various factors to ensure you make an informed decision. Here's a ten points checklist to help you during the process.
Buy term insurance as soon as you have financial dependents on your shoulder: Anyone who has the financial responsibilities of his/her loved ones, must buy a term insurance. The financial dependents are the family members who entirely rely on your income for their short term and long term expenses. It could be either your parents, your spouse or your children.
Determine your coverage needs: While buying term insurance, you must choose an adequate cover amount that meets your family’s requirements. You have often heard about using the thumb rule of 20X or 15X your annual income. But, keep in mind that this is just a thumb rule and not an accurate calculation. One must personalise its coverage amounts as per their needs.
Assess policy duration: Policyholder should decide on the term length as to till which age he/she should buy a term plan. It is found that stretching the length of your term policy up to 65 by another 10 years, costs you about 30% extra in annual premiums today. Extending the term by 15 years (to age 80) or 20 years (to age 85) costs you 46-47% extra in premiums.
Plan to end the term insurance as soon as you are financially free: If you become financially free once you don't have any dependents or have created enough wealth to support all your family's needs and then, you do not need a term insurance policy anymore.
Evaluate riders and add-ons as per your needs: Check if the policy offers additional riders like critical illness, accidental death, waiver of premium rider or disability benefits. One must consider whether these riders are necessary for their needs.
Choose the right premium payout option: The premium payable for term insurance is a critical factor governing purchase decisions. There are alternative ways to pay off the premiums in shorter and faster instalments which are as follows.
- Limited pay: It means the policyholder has to make recurring payments but for a pre-specified limited period. This duration is lesser than the policy term. But the term cover remains intact throughout the tenure. However, the premium instalments are higher than that for regular pay term insurance.
- Return of premium: It means the company has to pay back all the premiums you've incurred on a term plan if the insured survives the policy term. Also, the premiums are expensive like 2-3 times of limited pay.
- Regular pay: In this option, you have to pay premiums periodically as mentioned in the policy for the entire policy period. With regular pay, you can choose to pay your premiums yearly, half-yearly or monthly. The premium is lower as compared to the above mentioned options.
Choose the right payout option: A payout is a sum of money paid to a policyholder when a claim is accepted or when the policyholder dies, the nominee gets the money. Following are the options which are offered by insurance company:
- Lumpsum: As the name suggests, the full sum assured is paid to the nominee at one go. But, overall this is a risky option, especially if your family does not have prior knowledge and experience of managing a large sum of money together.
- Monthly income payout option: It means that the sum assured is to be paid in equal monthly instalments over your chosen period. This makes a lot of sense as the living expenses keep increasing with inflation over a period of time.
- Lumpsum with monthly income payout option: This is a combination of both the options. Here, the nominee would receive a specified portion, say 10%, of the sum assured as a lump sum immediately and the balance amount is paid in equal or increasing monthly payouts.
Opt for Married Women Property (MWP) Act: As per the India laws, your term insurance is part of your estate and the cover amount is first payable to your creditors, from whom you have taken any loans and not cleared their dues. If you’re male and married and want your term insurance money to reach your wife, you can purchase your term insurance plan under the MWP Act at the time of buying the policy.
Examine policy documents carefully: Read the policy wording document or any other document carefully and pay attention to the terms, conditions, and any specific exclusions or situations where the policy might not provide coverage or insurance company will not pay any claim.
Taxation benefit: With your term policy, you can maximise your tax savings under Section 80C and 80D of Income Tax, the maximum deduction allowed under this section is ₹1.5 lakhs per year for the premiums and add-ons (if taken).
Additionally, in the unfortunate event, the death of the policyholder during the policy term, the death benefit received by the nominee is typically tax-free. The sum assured paid to the nominee is exempt from tax under Section 10(10D) of the IT Act.
Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited