Term plans have always received a vote in their favour from individuals who are looking to insure their lives at a lower cost. And with good reason. But with so many life insurance companies vying for a place in the individual’s insurance portfolio, the options merit evaluation. Here, we present a few pointers on how to assess a term plan given the various options available.
Simply put, a term plan is a pure risk cover plan without any maturity benefit. This is because only mortality charges and administration expenses are covered in the premium amount; there is no savings element here. Hence, only in case of an eventuality do the individual’s nominees stand to ‘benefit’ by way of receiving the sum assured.
But term plan specifications differ across life insurance companies. Individuals should evaluate all the options at their disposal before finalising a term plan from a life insurance company. An illustration will help in understanding this better.At the same time individuals are requested to look at other insurance companies as the term plan specifications may turn out to be cheaper for a given set of criteria.
| Age (Yrs) |
AMP Sanmar |
Kotak Mahindra Old Mutual |
HDFC Standard Life |
| 30 |
2,600 |
2,755 |
2,920 |
| 40 |
5,400 |
5,400 |
5,110 |
| 50 |
- |
11,988 |
- |
Suppose an individual wants to buy a term plan with sum assured of Rs 1,000,000 for a 20-year tenure. As the table shows, at the age of 30, buying the term plan from AMP Sanmar would prove to be the cheapest (Rs 2,600). At age 40, HDFC Standard Life proves to be the better option at Rs 5,110. But once the individual attains 50 years, AMP Sanmar and HDFC Standard Life are unable to offer him a term plan for 20 years. This is because for both companies, the age as on maturity of the term plan cannot exceed 65 years. However, for Kotak Mahindra Old Mutual, the maturity age happens to be 70 years and he can therefore opt for a term plan even at the age of 50.
Let us take the above example a little further to better understand how plan specifications can make a difference to individuals while zeroing in on term insurance.
Suppose an individual is 25 years of age and he decides to buy a term plan for a sum assured of Rs 1,000,000. He would like to opt for the maximum possible tenure available with the life insurance company, which is how it should be in case of term insurance.
| |
Age (Yrs) |
Sum
assured (Rs) |
Max. available
tenure (Yrs) |
Max. age at
maturity (Yrs) |
Premium
(Rs) |
| SBI Life |
25 |
1,000,000 |
25 |
65 |
2,180 |
| Aviva Life |
25 |
1,000,000 |
40 |
65 |
4,100 |
As can be seen from the table, SBI Life offers him a term plan for a maximum tenure of 25 years, the premium for which works out to Rs 2,180. In case of Aviva Life, the maximum tenure available is 40 years and the premium for the same works out to Rs 4,100.
Common sense tells us that the individual should opt for the maximum possible tenure; in our case, he should ideally opt for Aviva’s term plan with premium of Rs 4,100. But our calculations show that opting for a term plan from SBI Life (premium of Rs 2,180) for 25 years and later, buying a term plan from another company makes more sense financially.
Annual
investment (Rs) |
Assumed rate
of return (%)* |
Tenure
(Yrs) |
Maturity amount
(Rs) |
| 1,920 |
8 |
25 |
151,592 |
| 1,920 |
9 |
25 |
177,262 |
| 1,920 |
10 |
25 |
207,709 |
According to the table, by opting for insurance from SBI Life and not from Aviva, the individual saves himself Rs 1,920 (i.e. Rs 4,100 – Rs 2,180) annually, for a period of 25 years (which is the tenure of the plan from SBI Life). Given that the annual savings are employed to earn a return, the individual stands to benefit from these investments. The benefits are after taking into account that the individual insures himself again for a tenure of 15 years with any other life insurance company.
Of course, the above details are only a case study to assess various term plans based on different parameters. All said and done, individuals need to evaluate the options available to them before they decide to finalise a term plan from a particular life insurance company.
The figures in the illustrations are sourced from company websites. The actual amounts might differ due to underwriting and various taxes, if any. For further details, individuals are advised to contact the insurance company.
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