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Term plans offer no-frills, low-premium life cover

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LOOKING TO buy his first life insurance policy, Rajesh Soni, 30, a manager in a private company, was a confused man. He was overwhelmed by the number and range of policies on offer from an ever-increasing number of insurers, and wasn’t sure which was the right policy for him. However, it helped that he was clear about what he wanted from his policy. "I wanted to insure myself for Rs 10 lakh, payable to my dependants in the event of my death before I turned 50," says he. "In addition, I wanted a pure risk cover: that is, I did not want any return on investment in case I survived the policy. And, of course, I wanted the cheapest policy going."

There is one class of insurance products that meet the specific needs of Soni–and others looking for the least-cost pure risk cover. These are term insurance plans, which offer life insurance for a specific number of years, at the least cost, with no survival benefits.

What do term insurance plans offer, what are their limitations, whom are they best suited for, what should you look out for when you buy them, and who offers the least-cost term insurance policy? We present here the definitive guide to buying term insurance policies.

What are term plans? They are life insurance in the simplest form: they cover the risk of your dying early, before you’ve accumulated enough to leave for your dependants; they provide this cover for a specific number of years; you get no benefits if you survive the policy; and since the entire premium you pay goes towards the cost of insurance, you generally get insurance cover at low cost.

In that sense, term insurance plans come closest to what you should look for when you buy life insurance. Says Pankaj Seith, manager marketing, HDFC Standard Life Insurance: "Everyone’s insurance portfolio should comprise a term cover."

Additionally, since they are so simple, term life policies can be easily compared on the basis of price. This has led to a very competitive market in which term life policies are rapidly becoming a commodity. Truth to tell, insurers don’t market term policies aggressively since they consider them a high-risk proposition, particularly with new clientele. And insurance agents are rather more keen to market money back and endowment plans, on which they get higher commissions.

As with other insurance policies, the premium paid on term plans qualifies for tax rebate under section 88 of the Income Tax Act (See: Best Tax-savers for 2002).

The right term. Term policies are available for tenures between five and 25 years. Before you buy one, it helps to be clear about your specific needs, which will define the period for which you need the cover. As you approach retirement, your need for life insurance generally tends to decline: by that time, your children are equipped to support themselves, and your retirement savings are big enough to see you through. Therefore, the tenure of your term cover should be determined by how many years you have until retirement.

Even if you’re adequately insured, there may be circumstances in which it would be prudent to go in for an additional term life policy of a shorter tenure. This is particularly true of periods when you are taking on greater risk, as when you’ve taken a loan to buy a house or a car. Taking a term life policy that closely matches the amount and tenure of your loan will shield your dependants from the burden of servicing the loan, in the event of your dying early.

The downside. Term life policies do offer the least-cost insurance cover, but they also come with some limitations. For instance, given the very nature of these policies, they don’t cover the risk to your life beyond the policy tenure. If you die even a day after your policy expires, your family doesn’t get anything. Therefore, if your need for life insurance cover extends to an indefinite period, you’re better off with a whole life policy, rather than with a term life cover. Under a whole life policy, you’ll pay a premium for the rest of your life, but when you die your dependants will get the sum assured.

Additionally, as with all insurance policies, term cover gets more expensive as you age. It’s cheap when you’re young, but, for the same sum assured, it becomes prohibitively expensive when you’re 60 or so. Some insurers offer term life policies with a facility to renew them without a medical test. This is a useful provision, particularly if the policy term won’t take you close to retirement age.

Therefore, if you think you’re likely to buy another term policy when one expires, you’re better off buying a "renewable" term policy; it’s equally important to make sure you can renew without a medical test. Some "renewable" term policies require you to take a medical test, and this will almost certainly bump up your premium, given the medical complications that inevitably come with advanced age.

What’s on offer. Term life policies are increasingly becoming commoditised insurance products and over time there may be little to choose between them. Even so, today some of them are marketed with value-additions; not all of them make perfect sense to someone who’s looking for low-cost life insurance cover. An overview of the terrain:

The cheapest no-frills term life policy available today, for a 30-year-old healthy male looking for a Rs 10 lakh cover for 20 years, is OM Kotak’s Term Life Assurance Plan for individuals. (Of course, these rankings may vary for policies for other tenures or sum assured.) OM Kotak’s annual premium plan can be had for tenures ranging between 10 and 20 years, and a healthy 30-year-old male who opts for a Rs 10 lakh plan for 20 years will pay a premium of Rs 3,700 a year (see sideshow: Term it right). OM Kotak also markets a single-premium term insurance plan.

Birla Sun Life’s Flexi Term Plus is second in line, with a marginally high premium. A healthy 30-year male will pay Rs 3,710 as annual premium for a Rs 10 lakh pure life policy for 20 years. Only those in the 18-55 age group can buy this policy, which is available for five, 10, 15, 20 or 25 years; the maximum age at maturity is 70 years. The minimum sum assured is Rs 2.5 lakh, and there’s no ceiling on the sum assured.

Tata-AIG’s Assure Lifeline Plan is the next in line. It’s Rs 10 lakh policy for 20 years will cost a 30-year-old healthy male an annual premium of Rs 4,550. Only those in the 18-50 age group can buy this policy, which comes in tenures of one, five, 10, 15, 20 and 25 years. Tata AIG’s term policies can be renewed on expiry or converted into an endowment plan.

LIC has four term plans: two-year temporary assurance plan, convertible term assurance plan, Bima Sandesh and Bima Kiran. The last two named are return-of-premium policies: that is, if a policyholder survives the policy, he gets back the entire premium as survival benefit. In addition, Bima Kiran offers loyalty additions and in-built accident cover. It’s a policy that’s proved immensely popular, but since it doesn’t meet the specifications of a pure life policy (as it offers survival benefit), we’re not considering them here.

The right mix. The wide range of insurance products on offer today poses a problem of plenty for a prospective buyer. It’s doubly important, therefore, to define your insurance needs before you go on a policy hunt.

But this much can be said with certainty: if you’re looking for the cheapest life insurance without any add-ons, term cover policies are the best value-for-money propositions going.

To pick out the insurance policy that's just right for you click here...