Kalyani Narayanan, CEO and Principal Officer says,

Term life is, by far, the simplest life insurance policy to understand.  Basically, it is the vanilla version of all life insurance policies.  So, what is term life insurance?  A person takes insurance on his life for a certain amount (called sum assured) and for a certain number of years (called policy term).  For example, Suman takes a term life insurance policy for Rs 1 Crore for 25 years.  If Suman dies anytime in the 25 years, then the insurance company promises to pay Rs 1 Crore to the person nominated by Suman.  For this promise, Suman pays about Rs 14,000 every year to the insurance company.  This money is called Premium.  So, what happens if Suman does NOT die in the 25 years?  He does not get back any money from the insurance company.  At the end of 25 years, the policy ends and neither Suman nor the insurance company owe anything to each other.

This article mainly talks about Term Life Insurance in a question and answer style.

What is Term Life Insurance?

It is a life insurance taken for a specific amount and for a specific number of years within which if the life insured dies, the nominee gets the amount from the insurance company.

Why take life insurance?

It is mainly to ensure that those family members who are dependent on the income of one person do not end up in hardship if that one person dies young.  For this that one person takes life insurance.

Do you need life insurance?

Do you have family members who are dependent on your income?  May be your parents, your spouse and children, your brothers and sisters?  Then, yes, you need to have your life insured

What should be the insurance amount?

Take the gross money you earn per year. Multiply it by 25 if you are younger than 35.  That should be the amount you should purchase the policy for.  For example, if your gross salary is Rs 15 lakhs per annum and you are about 35 years old, then you should have 15 lakhs X 25 = Rs 375 lakhs or Rs 3.75 Crores.  If you are older than 35, then take life insurance policy for an amount that is 20 times of your annual salary.  This is called sum assured or death benefit.

I already have some life insurance policy?  What should I do?

Add up all the life cover you have and see if it is enough as per the above calculation.  If not, get additional cover for the deficient amount.

For how long should I need the life insurance?

For as long as your family members are dependent on your income, you need the insurance.  This is generally till you retire, say at 60 or so.  For example, if you are 35 years, then take policy for another 25 or 30 years.   This is called policy term.

What are the different kinds of policy there is?  Which one should I take?

There are broadly two categories of life insurance policies:

(1) Term Policy - Covers only life – if the person who is covered in the policy lives on beyond the policy term, he            does not get any money back from the insurance company.  The policy ceases to exist.

(2) Savings Policy - Covers life + some money is there as savings – If the death occurs during the policy period, the        dependents get the sum assured. If person lives on beyond the policy period, then he gets the sum assured.

The first type of policy is a lot less expensive than the second kind. For example, if a non smoking male of 35 years wants to purchase Rs 1 crore of policy, till he is 65 years old, then he has to pay roughly Rs 12000 – Rs 15000 per year.  If the same person wants Rs 1 Crore as death benefit but also wants about Rs 1 – 2 Crores from the insurance company even if he did not die when he is 65 years old, then, he would have to pay about Rs 3,50,000 to 4,00,000 per year.  Basically, the company takes the additional money it collects from the policy holder and invests the same and pays him/her at the end of the policy term.

So, your priority should be to first get term life policy which covers only life so that your dependents do not suffer if you are not around to fulfil all the financial commitments.

What about tax savings?

The premium paid towards the term life policy along with riders is deductible under Sec 80 D.

So once I purchase term life, what do I do?

Ensure that you pay your premium on time.  In addition, year after year, your annual earnings would go up and your dependent’s lifestyle also goes up.  Therefore, you need to make sure that your total life insurance continues to be 20 or 25 times more than your gross annual income.  At 35, your annual income may have been Rs 5 lakhs and you may have purchased a policy for Rs 1 Crore, but at age 45, if your annual income is Rs 15 lakhs, then 20 times is Rs 3 Crores. You are Rs 2 Crores short.  So, you need to purchase another policy for this amount.

What are Riders?

Riders are additional features/benefits that you can optionally purchase over and above the base term life policy.  It is like additional topping such as chocolate sauce and nuts on your vanilla ice cream.  Generally, additions are considered ‘nice to have’, not ‘need to have’.  However, the riders on term life need a careful consideration.  Some of the most popular riders are:

a. Accidental Death Rider – This option generally pays twice the life cover if the person insured dies in an   accident.  An accident does not mean just road accident.  This could be any accident like falling while walking sustaining head injuries causing death as an example.  In the above example, if the 35 year old non smoking male gets life insurance and also opts for Accidental Death Cover Rider, then he may have to pay additional Rs 1000         or so to get this benefit.

b. Accidental Disability Benefit – Sometimes when one gets involved in an accident, the best thing that can happen is death.  What if the person does not die but is totally disabled?  The person not only unable to provide for the family that depends on him/her, the person also adds to the burden of the family to take care of him for the rest of life.   The disability rider provides the family with a sum if the insured person is permanently disabled.  Depending on the severity of the disablement, the percentage of reward amount is determined.  In the above example, it may cost about Rs 2000 to Rs 3000 more per year to add this rider to the base term policy.

c. Critical Illness Rider – There are many dreaded diseases that involves huge medical cost to get treatment, if at all.  Consider cancer for one.  This rider pays a sum to the insured if he/she is diagnosed with one such dreaded disease so that the person can get treated and become well.  It may cost about Rs 10000 more per year to avail Rs. 25 lakhs for this.

How the money is given in the event of death?

There are mainly two options given.  (1) Lump Sum option and (2) Monthly Income Option

Let us assume the person who has insured himself/herself dies during the policy term.  The family is given Rs 1 Crore which is the policy amount.  Is the family capable of wisely investing the money in such a way to live on that income?

It is very common that the wife becomes the nominee of the husband’s policy.  In such case, she is awarded the insurance settlement. If she or trusted family members do not have the required education to invest wisely, entire money can disappear in no time and the family is financially struggling to make ends meet with no one to help.

In order to avoid this situation, the term policy has the option where the policy holder can opt the amount be paid as monthly income to the nominee for several years.  By doing so, the family can better manage the family expenses better.

Therefore, if you believe that your dependents would not be able to manage the funds, then choose the monthly payment option.

In the monthly payment options also, there is a feature called increasing monthly income where every year, the monthly payment goes up to keep up with the inflation.

In my next article, I will focus on the policies that combine life + savings.

In the mean time, if you or anyone you know would like to know more about pure term life insurance, please do get in touch with us.

About the Author: Kalyani Narayanan is the CEO of www.easyinsuranceindia.com.  She is also a member of MRC.  She is an insurance broker who owns the site.