One day I was discussing with my friend about term insurance plans in India.
Our thoughts were so different about the term plan that we nearly had a tiny fight.
But the end was meaningful.
Both of us agreed on a point with a conclusive evidence.
No financial plan can be complete without inclusion of a suitable life insurance.
According to me, term plan provides the best life cover compared to other endowment plans.
But my friend did not agree with my concept.
I was more than convinced that a term plan is a necessary inclusion.
But my friend considered term insurance plan as a mere cost.
My friends point about term insurance plan was, as it has no maturity benefit, after expiry of the policy term all money is lost.
To an extent this point of view is not wrong, but it has less depth.
Lets see how…
#1. What is a term plan?
Term plan is a life insurance policy which is very cost effective for the policy holder.
Term plans provides insurance cover for the policy holder.
In case of demise of the policyholder while the policy term is valid, the beneficiaries get an insurance benefit.
The insurance benefits are paid in monetary terms.
The sum assured (insurance cover) is a pre decided value which is paid to the beneficiary.
But what happens if the policy expires and the policy holder is alive?
In this case the sum-assured is paid to no one.
How to know which companies offer the best term plan?
#1 See the claim settlement ratio
Term plans in India are offered by several companies. How to identify the best term plan out of all?
“Claim settlement ratio” is indicated in percentage, highlights the number of death claims settled by insurance company.
In terms of claim settlement ratio, Life Insurance Corporation of India scores the best rank with 98.14% claim settlement ratio.
The second is Bajaj Allianz Life Insurance scoring 98.10% in claim settlement ratio.
The third is Max Newyork Life Insurance scoring 96.23% in claim settlement ratio.
#2 Check insurance premium
This check is important from point of view of term plan users like you and me.
The terms plan which charges lowest premium for the same life cover becomes most desirable.
I think, no sane person will contest this fact that life cover is a must for all family.
And there can be no more-economical life insurance plan than term plan.
Term insurance plan offers much bigger cover (compared to traditional endowment policy) for the same premium payment.
Hence term plan is best type of life insurance that people can avail.
Consider a term plan whose premium payment is Rs.15,000 per year providing a live cover of Rs.1.0 crore.
But all this Rs.15,000 as premium will possibly never come back (if not claimed).
Consider this, suppose tenure of term insurance plan is 20 years.
In this tenure what is the total premium payment to be made? Rs.15,000 x 20 = Rs.300,000.
People who do not like term plans say that as premiums are lost forever, its better to invest the same amount in a debt linked SIP plan or in bank FD.
Investing Rs.15,000 per year in a debt linked plan (or FD) will build a corpus of Rs.700,000 in 20 years.
Means, by investing Rs.300,000, return is 700,000 after twenty years.
But what is the value of Rs.700,000 after twenty years?
In today terms, Rs.700,000 of twenty years from now is equivalent to Rs.220,000 of today.
Now I asked this to my friend, which completely changed his point of view about term insurance plan?
If something happens to the bread earner of the family, how long Rs.220,000 will last in today terms?
Probably not more than 3-4 months.
On the flip side, if there was a term insurance plan in place, the family would have received Rs.1.0 crore as a death benefit.
No points for guessing that when circumstance goes south, term insurance plan can provide fantastic protection.
But without a life cover, accumulated amount through savings may not be enough.
If life was more certain, term insurance plans would look like a useless product.
But knowing life the way it is (full of uncertainty), there can be not be an insurance product more apt than a term plan.
It is not fair to tag term plans as an ‘expense’, its one of the best saving tailor made to manage a case of extreme emergency.
A suitable life cover can help take care of daily needs of the family.
Essential family expenses like:
- Home loan EMI,
- School fees,
- Monthly grocery,
- Utility bills etc…
These can be easily taken care by death benefit provided by term plan.