Term plan’s sum assured must be at least 10 times annual income

Buy a sum assured that is at least 10 times of your annual income


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What are the main things to check when selecting a life insurance policy? I am 31 years old and married.

—Rajneesh Sharma

The two most important factors to consider in a life insurance policy are the insurer’s claim settlement track record and the sum assured paid on death.

Insurers who haves claim settlement ratios of at least 5% or more are recommended. You can source the claim settlement ratios of various insurers from the Insurance Regulatory and Development Authority of India’s (Irdai) annual report.

The quantum of death benefit payable is also important to consider. This can be increasing, decreasing, or flat over the term of the plan. It is advisable to take a flat sum assured.

You should also consider the riders available with the plan. For example, a critical illness rider pays a lump sum amount in case of diagnosis of specified major illnesses. At your age, a term plan is recommended. Buy a sum assured that is at least 10 times of your annual income.

Are there term plans that come with money-back options?

—Tony Thengzhula

There are term plans available with a return of premium option. These work as standard endowment plans. In such plans, if there is no claim till the end of the policy term, the entire premium paid is refunded. However, these plans are expensive and do not justify value for money. The effective return in these plans is low, and if the incremental cost of such a plan is deposited in a bank fixed deposit, your return would probably be higher.

A standard term plan is more suitable. You may want to consider riders that enhance the protection element in the plan. For example, a waiver of premium will waive off your future premiums in case you meet with an accident, or a major illness.

What is a surrender value? How is it calculated in a term plan and an endowment plan?

—Kriti Khemka

Surrender value is the sum of money receivable if the policy is discontinued in the middle of the policy term. A standard term plan has no surrender value. Only term plans with return of a premium option carry a marginal surrender value.

Surrender value for endowment plans vary by product and tenure. It is calculated uniquely for each plan, and there is no fixed formula. Each plan has its own unique surrender value schedule that is linked to the number of years of paid-up premium. What is generally true, though, is that surrender charges are very high.

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