If you are looking for a black and white answer to this question, you are going to be disappointed. I don’t have the answer myself. In my opinion, there is no such thing as the best term insurance plan. A lot depends on what you need and are comfortable with.
The purpose of this post is not to find out which is the best term life insurance plan. The intention is to help you find out which is the best term insurance plan for you.
In this post, I will focus on how you should go about finalizing the best term insurance plan for yourself. Should annual premium be the only criteria? Or there is more to it?
Let’s first focus on the parameters that you might consider at the time of purchasing a term life insurance plan.
Parameters to consider while purchasing term insurance plans
- Annual premium (after loading for health condition): Lower the better.
- Payout option (Lump sum, income or both): Your choice must be driven by investment management skills of your nominee.
- Features/Coverage: Though the life insurance is supposed to cover only death, you can add a few riders to the base plan to augment insurance coverage. Not all term plans offer all the riders. If you are looking for a specific rider, your options may automatically be limited.
- Claim Settlement Ratio: I would ask you not to read too much into it. Even for the company which as 99% claim settlement ratio, you need to ask the remaining 1% whose claims were rejected. The Insurance Amendment Act, 2015 has a provision that a life insurance company cannot reject claim after three years (for death claim). Hence, I expect this to be less of a problem.
- Comfort with the insurance company: Most of us trust LIC better than others. Don’t we?
- Online or offline: Online is likely to be cheaper.
Comparison between various term life insurance plans
I have picked up a few plans from the universe of online term life insurance plans available. I do not, in any way, mean to say that these are the best term insurance plans in India.
To be honest, there is not much to differentiate between the plans in term of coverage. All terms plans provide nominee the Sum Assured amount in the event of demise of the policy holder.
However, depending upon the plan or choice specified, the manner in which the nominee receives the payment (lump sum, income or both) may vary across plans. For more on payout options and which payout option to choose, you can go through my post on Income Replacement Term Insurance plans.
Additionally, you can add a few life insurance riders to your plain vanilla term plan to fill a few gaps in your insurance portfolio.
I have picked up the following six plans.
- HDFC Life Click 2 Protect Plus
- ICICI Prudential IProtect Smart
- Max Life Online Term Plan
- LIC e-Term plan
- Aegon Life iTerm Plan
- SBI Life eShield plan
I have compared the aforementioned plans on payout options and rider options available. The premium for a specific scenario is also provided.
I have only considered the premium for a healthy 30 year old non-smoker male. Sum Assured is Rs 1 crore. Payout option is Lump sum. The premium is for the plain vanilla term plan without any rider.
Remember the insurance company may choose to hike premium for you based on your medical history and outcome of medical tests.
To add riders to the policy, you will have to pay additional premium. In some of the plans, terminal illness rider and waiver of premium on disability may be part of the base plan.
Choice of Payout Option and Riders can affect your annual premium
Let’s see how the annual premium gets affected by adding a few riders. I pick Max Online Term Insurance plan and see the impact of purchasing riders.
What should be the policy term?
Typically, most people simply subtract their current from their retirement age to arrive at the policy term. For instance, if you are 35 and expect to retire by 60, the policy term will be 25 years.
The annual premium depends on the policy tenure too (apart from age, Sum Assured and your health condition). Lower the policy term, lower the premium.
For instance, premium for the same person for a 20 year term under HDFC Click 2 Protect Plus plan will be Rs 8,760 per annum. The annual premium for 15 year term will be Rs 8,256. Contrast this will annual premium of Rs 10,738 for 30 year policy.
To find out the right policy term, you need to go to basics of calculating your life insurance requirement. The Sum Assured along with your accumulated wealth should be sufficient to square off all your loans, meet all your financial goals and provides for expenses to maintain family’s lifestyle.
So, if you feel you will be able to amass enough wealth for all this in the next 15 years (based on your savings and cash flows), there wouldn’t be any need for life insurance policy after 15 years. However, you need to be doubly sure of this. There is not much scope for error.
In case you are in doubt, purchase the cover till your retirement. You can always stop paying further life insurance premiums when you think you have enough wealth for family and financial goals.
Which is the best term insurance plan for you?
The one with the lowest premium? In my opinion, the answer is no. You must first assess type of term life cover most suited for your family. Find out the life insurance coverage amount. Focus on annual premium subsequently.
For instance, LIC e-Term Insurance plan does not offer accidental disability benefit. If you are looking for a term plan that offers accidental disability benefit, then LIC e-Term plan is not the plan for you.
Do note I am not saying you must purchase a term life plan with accidental disability benefit. However, in my opinion, you need disability cover. If you have no other form of disability cover, purchasing accidental disability rider with term life plan might be a good idea.
Must Read: Do you need a personal accident cover?
Here’s what you should do.
- Decide the coverage amount (Do not get fixated with randomly large numbers)
- Decide the policy term
- Decide the payout option. Lump sum, income or both?
- Decide if you need to add a rider to augment your insurance coverage. I am talking about life insurance riders (and not traditional plans or ULIPs). Riders will add to the cost.
- Choose the insurer you are comfortable with. Go with the brand that you think is the most reliable.
- Consider the premium cost.
You may give weight to claim settlement ratios too. However, in my opinion, if you make adequate disclosures at the time of purchase of policy, there is little that the insurance company can do at the time of claim. In any case, the way claims settlement ratio is reported leaves much to be desired. Insurance companies may be much more comfortable settling claims in traditional plans or ULIPs as not much money is at stake. Term insurance is a different ball game altogether. There is no separate reporting for different kinds of life insurance plans.
Prepare your family
You will never be able to tell how good your life insurance plan is. Only your nominee can.
Don’t expect the insurance company to hand over the Sum Assured to your nominee on the platter. The insurer will try to find ways to reject your claim (or rather completely satisfy themselves before it settles the claim amount with you nominee). Prepare your nominee for the fight from today itself.
Personally, I don’t trust insurance companies beyond a point. Neither should you.
Do not hide anything from the insurance company. You must make all medical disclosures. Let the insurance decide if the disclosure is material or not. If the insurance company loads the premium based on the disclosure, so be it. Paying a higher premium is much better than your family going through mental and financial trauma of claim rejection.
Must Read: Why insurance claims get rejected?
Addendum: How do you purchase a term insurance plan online?
- You select the plan, fill in the personal details and make payment online.
- Insurance company seeks more information and records about your medical disclosures. If required, the insurance company arranges for a medical test.
- Based on medical disclosures and findings of the medical test, the insurance company may choose to issue the life cover at the same price (as paid earlier) or at a higher premium. Do note the insurance company can even decline to issue the life cover altogether.
- If the insurance company increases the premium, you can refuse to accept the cover. Insurance company will return the premium paid after deducting the cost incurred for medical tests.
- Even if you purchase the policy, you have an option to return the policy within the free-look period of 15 days from the date of receipt of policy document. The insurance company will return the premium paid after deducting the cost for medical examination.
Links to Insurer websites