Protect dependents from financial liability

Term insurance or protection plan falls under the pure risk cover category. This category of products only has the protection element and no maturity benefit associated with the policy. For example,the policy will only make a payment to the policyholder in the event of the specified event (death) occurring. Term insurance plans are usually cost-effective. In fact,term insurance plans are more cost-effective,when bought online. For example,with a protection plan,a mere sum of Rs 2,508 annually (exclusive of service tax & educational cess) could help provide a financial cushion of up to Rs 10,00,000 in the event of death of the policyholder (example based on a male policyholder aged 25 years,with a 25 year term).

Term plans are insurance products in their purest form i.e. they are designed and priced so that the policyholders,as a group,are effectively pooling their premiums in order to pay a benefit for a random and uncertain,but significant event that may occur. This means that for each policyholder the cost of providing the cover is relatively modest in comparison to the benefit that would be provided if that event occurred.

When to opt for a term plan?

A term plan is ideally suited for individuals,who are the single bread earners of the family,possessing good insurable health and those with high financial liabilities. Usually,low-income,high financial liabilities,dependent spouse and children and good insurable health are all the triggers for choosing a term insurance. The younger one starts,the better,as premiums will be low,when the individual is younger and healthier. Also,when the insured is young,he/she can avail of longer term coverage.

Term plan is ideal for an individual to protect dependents from any financial liability such as a housing loan,childrens education loan etc in case of death. The ideal time to buy term insurance is when an individual creates the loan liability. Apart from the price factor,the service,advice,brand value and claims settlement ratios of a life insurer need to be taken into account while purchasing a term plan.

Term cover

While determining the right term,one must consider factors like long-term financial commitments and the possibility of deterioration of health parameters in future. It makes sense to purchase a term cover when the same is available for the maximum term available. Once can easily drop the cover at a later stage in case the same is not required,without any kind of penalty.

As the name suggests,term plan is for a specific period or term. This term can range from 5 to 30 years depending on the individuals preference or financial needs. The premium will stay the same for the duration of the term,for example,10,15,20 or 30 years.

The term cover sometime carries an option for guaranteed renewal on expiry,without any health evidence. Such contracts are called renewable term contracts. Under renewable term contracts just before the expiry of the policy,the insured has a choice to continue with the policy by renewing the same. The premium on renewal will be charged at the rate applicable to the attained age at the time of renewal. It simply means that the premiums typically will go up at every renewal.

There is no such thing as an ideal policy term,but generally ones cover should last till their working life assuming the liabilities have decreased and dependence of nominees on the insured has reduced.

Benefits of Riders

While purchasing a term plan,one must be aware of optional riders available with the base policy. Riders provide additional value to a basic term plan,at marginal cost. Riders are not standalone products,but an additional benefit option that can be purchased along with the basic insurance plan. The most popular riders available in the market are accidental death and disability cover,critical illness cover etc.

A life insurance contract is a contract of utmost good faith,wherein it is the duty of an individual to inform the insurer of any facts that have the capacity to increase the risk for the insurer. One must read the proposal form after it has been completed and confirm that all answers are completed correctly and there is no misrepresentation in the proposal form.

This is important as the claims will be payable only when utmost good faith is observed while purchasing life insurance and there is no misrepresentation or false information given while answering questions in the proposal form.

Author is executive director and chief operating officer,HDFC Life