Life Insurance Term Plan: 5 practical buying tips

Over the last couple of weeks, I have had several queries on life insurance. Thankfully, the readers were aware that term plan is the right insurance product to buy.

Yet, when it comes to actually buying the term plan product and decide which policy to go for, some questions do remain. This post is going to deal with those questions and attempt to give perspectives, which you can use to find your own answers.

The questions around buying life insurance term plan

The most common questions are

1. Should one buy term plan online or offline?
2. Should one buy it from the insurer with the best claim settlement ratio?
3. Should one break the required insurance cover into multiple policies or buy just one policy?
4. Should one select regular premium or lower premium payment period option?
5. Should one buy it from LIC or a private insurer?

I will try and use the learnings from the interactions with my clients, readers as well as my own experience, to offer various perspectives. I would be happy to read your thoughts and feedback in the comments too.

Let’s go.

#1 Should one buy term plan online or offline?

The debate is almost settled there. Term plan is a standard product with standard clauses.

Online term plans come at a much lesser premium than the ones bought offline. There is no reason why you should pay a higher premium through an offline policy.

Within online too, you can choose from plans offered by various companies.

#2  Should one buy it from the insurer with the best claim settlement ratio?

Claim settlement ratio is considered to be the final determinant for buying a term plan.

The whole idea of buying a term plan is that in case of loss of life of the bread earner, the family and dependents should get enough money to take care of themselves. You just do not want a situation where the insurance company does not honour the claim and your family is left in the lurch.

So, yes claim settlement ratios matter. But do you need to go with the one with the highest ratio? That may not be necessary. The other companies may not have as good a ratio for various reasons. That does’t mean that they do not honour claims.  As long as your application was perfect and you disclosed all personal details including medical condition, there is no reason for the company to deny claims.

Not every company may have a 98% claim settlement ratio. However, in my view, if a company has over a 90% claim settlement ratio, I would consider its term plan.

#3 Should one break the required insurance cover into multiple policies or buy just one policy?

That one needed some thinking. Actually, taking multiple policies sounds like a good strategy to me.

The argument in favour of this strategy is that if one of the insurance companies was to go kaput, that is, disappear, you would have the other one to honour the claim.

Not just that, for some reason if one company were to dishonour the claim, at least there is hope that the other would provide the amount of insurance cover taken from it.

Let me add one more reason to this.

We need life insurance to provide for our dependents in case something happens to our life. This is more important in the initial years when you have not built enough wealth or have adequate investments.

However, as time progresses, you would need less insurance as compared to the past. Simple reason being that you would have enough investments to provide support to your dependents. Also, a lot of your financial needs may already have been taken care of.

For example, you took a term plan to insure your housing loan. If something happens to you, the insurance amount would be enough to pay the bank for the balance loan. Your family can enjoy the home for the rest of their lives, hassle free.

Now suppose, you were to pay off the loan in a much lesser time. In that case, there is no point continuing the insurance cover and pay the premium. It is an unnecessary expense. You would ideally stop this policy.

Now, if you had taken only 1 policy for the entire insurance cover that you needed, it would be difficult to discontinue one part of it. In fact, it is impossible. You would have to discontinue the entire policy and take a new one. That may not be wise given that the new premium could be much higher or you may not be offered a new policy at all.

So, what you do is that you take say 2 or 3 different term plan with different amount of cover. As time passes, you re-assess your insurance need and see if you need to continue all policies or discontinue one of them. This way you could save on some premium too.

Makes sense?

#4 Should one select regular premium payment option or an early premium payment option?

So, you are buying a Rs. 1 crore term cover for 20 years for yourself. You had thought that you would pay premium every year, regularly.

However, the insurance company has proposed that you can pay the entire premium over just 10 years. What should you do?

I don’t see a reason why you should do that. When you pay the premium in a period less than the cover period (in the above case, 10 years instead of 20 years of policy cover), you pay more premium.

So, if you were to pay regular premium every year till the policy period, it would be Rs. 15,000. However, if you were to pay the premium in just 10 years, the premium would be Rs. 30,000. Plus, there is no change in benefit. If you pay regularly, then too your dependents will get Rs. 2 crores.

We observed in a previous example about the home loan that you may want to discontinue the policy before the policy period ends. Now, if you have already paid the premium in advance, there would be no benefit or no savings in premium on discontinuing the policy.

#5 Should one buy it from LIC or a private insurer?

LIC has a strong reputation for being a government organisation and it enjoys wide trust due to the monopolistic position it had in the market for many years. So, much so that when people talk about buying insurance, they say “buy an LIC“.

Even though LIC charges relatively higher premiums for their term plans, compared to other insurance companies, people have a preference for it.

The claim settlement ratios also seem to favour LIC. It has the highest ratio amongst all companies, at about 98%, for the year 2013-14 (as mentioned in the IRDA Annual Report).

In my opinion, you should look beyond LIC too. You can go for other insurance companies who offer similar products at a much lesser premium. These include companies like HDFC Standard Life, Max Life, Bajaj Allianz, Reliance, ICICI Prudential, etc. The comparative claim settlement ratios of these companies are also good, usually around 90%.

To share an example with you, one of my readers has an LIC term policy with a cover of over Rs. 2 crores. He is currently paying a premium of 94,000 per year for this policy. This is insane. A similar policy with HDFC Standard, as an example, would come for a premium not exceeding Rs. 30,000.

So, these were some of key questions faced while looking to buy term plan insurance. Hope this proves to be useful in your quest to protect yourself and your family.

Further read: Demystifying your life insurance premium

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Between you and me: Do you have term insurance? Please do share your own experience with life insurance. The comments section is waiting for you. 🙂