Choosing a no-frills insurance plan

If you are looking for a no-frills insurance plan that covers you against risk to life, then a plain-vanilla term assurance plan may be your ideal investment.

It provides basic life cover to an individual and compensates dependants for the loss of an earning member of the family, in the event of his death.

For individuals, term assurance is the first type of life insurance to be bought before they plan for any other kind of investment.

Of late, individuals taking home loans or other large obligations have started to opt for a term insurance policy along with the loan, in order to secure their family against the loan obligation in the event of their death. With expanding choices, premiums on term assurance policies have become very competitive.

A term policy can be taken to cover an individual alone or his/her spouse (joint life) or to cover business partners. Term insurance plans are non-participating policies. Therefore, if the insured survives the term, he will stand to receive no maturity value at the end of the term.

Term insurance is intended to compensate your family for loss of income. Assuming Avinash, aged 25, earns Rs 5 lakh per annum and his yearly financial commitments total Rs 3 lakh, he has to plan for the sum assured based on the requirement. In this case, if the dependant can earn a return of 7 per cent per annum, he has to buy a plan for Rs 40 lakh.

A point to remember here is that most insurance companies offer term plans for a maximum period of 25-30 years and cover is provided till the age of 65 years.

Apart from one policy for income replacement, an individual can take separate policies for the other financial goals such as education and marriage of the dependant children. Separate policies can be taken for these and discontinued if the goal is reached.

Types of term insurance

Level Premium: Under this option, your risk cover and premium remain the same throughout the policy term. This type of option is considered to be best if one prefers to plan for income replacement, after one’s time. In the event of death, a lumpsum payment is made and the same can be invested to secure monthly income for dependants.

Decreasing cover: The sum assured gets reduced every year and becomes nil at the end of the term. These plans are ideal if linked to your home loan or to any other business loan. As the loan outstanding reduces, the cover will fall accordingly.

Single Premium: Several insurers allow you to pay a lumpsum premium at one go. This may factor in a good discount to your regular premium and is ideal if you have an irregular income stream and cannot commit to regular premia over time.

Riders

Term policies also allow you to add other riders or benefits on payment of additional premium. A few key ones are:

Critical illness benefit: If one is diagnosed with any illness covered by the policy, a lump sum is paid and the critical illness rider then ceases to be in operation. However, the basic sum assured continues to be in operation.

The general rule is that if one survives for 30 days after the critical illness, the entire sum insured, including critical illness, is paid.

In comparison to general insurance, here the entire cover is paid, irrespective of the actual money spent on treatment. Some insurance companies offer a cover that is as high as Rs 50 lakh under this benefit.

Accelerated Sum Assured benefit: On diagnosis of any one of the critical illnesses, the sum insured is paid and the basic policy terminates without any value.

Accident death benefit: In case of demise by accident, an amount equal to the sum assured is paid in case of accident, or if death occurs within 90 days from the accident.

Choosing term plans

Some insurance companies offer return of premium and others offer plain products. It is advisable to take plain products and save on the extra premium, which can be invested in other avenues.

It is important to remember that taking insurance gets more expensive as you get older, therefore locking into a term plan early in your life makes sense. Premiums for term insurance policies are based on a number of factors, including age, gender, state of health and lifestyle.

Some insurance companies offer a discount on the premium for a non-smoker.

Therefore, it may be best to do some comparison shopping based on your requirements and select the provider who offers a competitive rate.

Tax benefit: The premium paid on your policy is eligible for tax benefits under the overall investment limit under section 80 C. In the event of death, the money received from the insurance company is tax exempted under section 10 (10D).

The premium paid for accelerated sum assured is exempted under section 80 D.

Hence, plan your requirement and select a term insurance policy as soon as possible because when it comes to term policies, early initiation translates into straight savings on your premia.

Source: Business Line