The premium that pure term plans charge is the lowest among life cover policies as they provide life insurance only for a specified number of years. Term plans don’t offer any returns—they focus only on providing life cover and have no savings element. If you outlive the policy, you will not get anything, but if you die during the term of the plan, your nominees will get the sum assured. So, if your aim is not to use insurance as an investment avenue, but only to protect your dependents from a financial crisis in case you die prematurely, a pure term plan is the product for you, because it serves your needs at the lowest cost.
Declining premiums
The good news is that at least three life insurers—Kotak Life, ING Vysya Life and Aegon Religare Life—have lowered premiums on their pure protection term products. Insurers have to set aside a part of their capital as reserve for every term plan they run. The fall in premiums has been made possible due to lower reserves allowed for term plans by the Insurance Regulatory and Development Authority (Irda) in March.
Also See: Premiums: Now and Then (PDF)
Aegon Religare launched the cheapest term plan across most ages and duration after starting operations in August. The maximum term of the plan is 30 years and it can be held till 75 years. It allows hikes in the cover amount without further medical or financial scrutiny on special occasions such as marriage or childbirth.
ING Vysya Life also launched a term plan, ING Term Life, with lower rates in May, but it claims it was not prompted by Irda’s ruling. Apart from the choices of single and regular premium payments, premium paying terms (PPT) of three or five years are also available. If you go for a three-year PPT, you can get coverage for, say, 30 years by paying premiums for only three years. This is perhaps the most unique feature that any term plan can offer. The plan’s maximum entry age is 65 and coverage can be taken till 75. Most insurers provide coverage only till 65.
Kotak Life, too, has reduced premiums on both its pure term plan and the Preferred Term Plan for non-smokers. If a person aged 38 buys a cover of Rs50 lakh till 60, the annual premium would be Rs17,600 now, a fall of 22% from Rs22,635 earlier. Similarly, the annual premium of the insurer’s term plan of Rs20 lakh with a term of 20 years for a person aged 40 was Rs10,340 till March, but is Rs9,460 now.
What to look for
As term plans don’t have any surrender or maturity value, purchase decisions are often based on the premium. However, one’s choice should be guided by other factors too.
Paying term: Limited PPT, in which a higher premium is paid for only the initial years of the plan, can be a better option than paying premium every year if you want a big cover and can afford high premiums over the first few years. While limited PPT lowers the total premium outflow, it also prevents the policyholder from benefiting from falls in the premium in future. The PPT advantage is also diluted if the policyholder dies early.
Duration: Unlike endowment plans, the premium for term plans rises as its duration increases. However, life is uncertain and you should ideally choose a plan that covers you for a long time. Term cover can be dropped easily once financial responsibilities end. It does not make sense, for instance, if a 30-year-old buys a term plan for just 25 years.
Maturity age: If you expect to have dependents till late in your life, look for term plans that have a high maturity age. Most term plans provide coverage till 60 or 65 years.
Top-ups: Some plans allow hikes in cover at regular intervals without any financial or medical underwriting. Higher incremental premiums may be required as age advances, but they may still prove helpful in circumventing age-related health problems. These annual hikes are capped, but even small increases at regular intervals add up to a neat overall rise. For instance, if a cover of Rs10 lakh is increased by 5% every year, the total cover would become Rs15 lakh in 10 years.
Buy early
The right time to buy term cover is when someone is financially dependent on you. Apart from low premium, there are other reasons for purchasing a pure term cover early in life.
Health issues: The health status of the person buying a term plan goes a long way in deciding the premium and even whether the policy will be issued to him. There are stringent medical tests and processes before a policy is issued. In some cases, extra premium is charged if the health reports do not fall within the insurer’s underwriting limits.
Saving the surplus: Buy a term plan with adequate coverage to keep away worries. Once your life is protected, it will be possible for you to deploy your savings more efficiently. It will help if you choose the right instruments with the aim of creating wealth in the long run.
More to come
Premium is largely a function of mortality rate (number of deaths per thousand), the insurer’s expenses and interest rates. The mortality rate being used by all insurers is based on the 1994-96 mortality tables. A fall in mortality rate due to higher life expectancy will push premiums down further. Insurers can afford to charge less if policyholders pay premiums for longer periods on account of an increase in average longevity. A recent US report says that according to the Insurance Information Institute, a US trade group, term cover premiums have fallen by 50% over the past decade in the US. The reason cited for this is a change in mortality tables due to a rise in life expectancy.
Though a similar situation is likely to develop in India too, you should not wait till then to buy a term plan. When it does happens, you can decrease your overall cost by buying more.