ULIP : Unit Linked Insurance Plan.It is a product offered by insurance company which gives investor both insurance and investment under a single integrated plan.
Will : legal declaration of how a person wish his/her possession to be disposed after their death
Fund : An amount of money saved or collected for a particular purpose
Return : Profit or loss derived from an investment
Investor : An investor is any party that makes an investment.
Insurance Regulatory & Development Authority, it is the apex body overseeing the business of insurance in India. It regulates the business of insurance thereby protecting the interests of the investors.
It is a type of pure insurance plan where the beneficiary will get the benefit only in case of death of the policy holder during the policy term.
It is purchased separately with the basic life insurance policy. It provides additional benefits like accidental cover, critical illness at additional cost.
Person(s) who will be authorized by the policy holder to enjoy the benefits of the policy in case of the death of the policyholder or owner of the policy.
Amount paid to the insurance company for the purpose of the person’s insurance.
Future Value (FV) is the value of an asset or cash at specified point of time in future. This can be derived from the Present Value of the cash or an asset.
Unit Linked Insurance Plans are the type of insurance where part of your money is invested in units that represent Shares and debt instruments and the remaining is used for your premium.
Person(s) who will be authorized by the policy holder to enjoy the benefits of the policy in case of the death of the policyholder or owner of the policy.
Amount paid to the insurance company for the purpose of the person's insurance.
Are you one who decided to purchase Term Insurance plan but still confused which company to opt?
Do you pay a higher premium or lower premium for your term insurance?
Are you sure that the company will settle down your claims or not?
Are you still confused to choose which will be the best insurance plan?
If so then have a look over this and know more about term insurance plans. It will guide you to choose the best term insurance plan.
Why do investors prefer TERM insurance?
Term insurance is a very basic form of insurance.
- – Are you one of the breadwinners of the family?
– Are you serving a loan or liability?
– Are you looking for a High cover at a Low Premium?
If yes, then term Insurance will be your choice.
Term insurance is an important step in your financial planning. In case of your demise during the policy term, the claim amount from the insurance company will financially protect your family throughout their lifetime. It also helps them to take care of liabilities and loans. It also offers a high cover for a relatively smaller premium.
Features of Term Insurance
- The most salient feature of Term Insurance is its affordability. The premium for the plan is the cheapest as compared to other insurance policies.
- Term policies can be purchased very easily through offline (like brokers, agents etc) and through online. Also, online term policies are 40% to 60% cheaper than offline term insurance plans since there is no intermediary commission and other related charges.
- Term Insurance policies are flexible and provide a premium option of monthly, quarterly, annually or semi-annually.
- Term insurance gives purely death benefits to the insured.
- Term insurance is completely tax-free, i.e., beneficiaries don’t have to pay any taxes on the claim amount of death benefit.
Example of Term insurance
What would be his premium? Do you think he needs to pay a huge premium every year?
As per the calculations, Rs.5968/- (including taxes) will be his premium annually. Less isn’t it?
If he passes away before 58 years, then his family members will be paid with a Sum Assured of Rs.55,00,000 which is higher than his premium payment for 30 years (i.e., approx. Rs.1,79,040). There is no maturity benefit under this term policy.
10 essential things to remember while buying term insurance
To choose the right Term Insurance, every investor needs to be aware of these 10 essential things. This can act as a checklist to choose the right term insurance plan.
1. How old the insurance company is?
You can choose a plan based on the year of establishment of insurance companies. Because there are only 24 companies in India.
Eg: Mr. Gowtham is planning to choose a school for his daughter’s education. He made research based on the reputation of the school, well-qualified professors, long term position etc. This made him help her daughter with good knowledge.
Likewise, if you choose a term plan based also on how old the company is, it will be a solid decision.
2. Which mode of buying the policy is considered?
While purchasing a term plan, determine whether you are buying the plan online or offline. In the case of a term plan, buying online is more advantageous and economical. Because there will not be any charge of commission since there are no intermediaries involved while buying the plan.
3. Do you consider Premium against the size of life cover?
The premium value may differ from one company to other on term insurance plans. Compare the premiums for the size of the life cover offered by the insurance company. This should be ideally large to cover all your debts as well as aid your loved ones to lead a comfortable lifestyle in case of your demise.
Also, the premium should be low and pocket-friendly for the cover you opt for.
4. Claim settlement ratio
One of the major points to consider while choosing a term insurance plan is the claim settlement ratio. Claim settlement ratio refers to the number of claims that the insurance company has paid following the death of the policyholders. In other words, the percentage of death settlement claims settled by the insurance company in the past is known as a claim settlement ratio.
It can be computed as,
Claim Settlement ratio = Total number of death claims settled / Total number of death claims received.
Eg: If a life insurance company receives death claims of 1000 and they settles 987 claims, then the claim settlement ratio would be 98.7%. Since the higher claim settlement ratio helps an individual to choose the best term insurance plan.
Will IRDA Claim settlement ratio helps in choosing the best term insurance?
Yes, Claim settlement ratios are one of the factors to be considered while choosing the term plan.
Why are you buying life insurance? If I am not there my family will get the sum assured and have financial security.
But what will happen if your claim gets denied – the whole purpose of taking a term plan will be defeated. So, it’s better to check it rather than sorry.
It will help the policyholders to choose which company has settled the maximum claims in that financial year. Yes, Higher the claim settlement ratio, better are the chances of availing the entire sum assured amount.
A tabulation showing different companies claim settlement rates in percentage.
|IRDA Claim Settlement Ratio 2017-18 (upto 31st March 2018)|
|Total Claims||Claims Paid||Claims Repudiated/Rejected|
|S.No||Insurer||No. of Policies||Benefit Amount||No. of Policies||No. of Policies in %||Benefit Amount||No. of Policies||No. of Policies in %||Benefit Amount|
|1||Aditya Birla Sun Life||5491||274.17||5292||96.38%||248.16||154||2.8%||16.26|
|4||Bajaj Allianz Life||14315||371.22||13176||92.04%||311.59||829||5.79%||27.25|
|5||Bharti Axa Life||888||44.11||860||96.85%||42.48||21||2.36%||0.89|
|6||Canara HSBC OBC Life||837||53.38||797||95.22%||49.13||38||4.54%||3.63|
|7||DHFL Pramerica Life||592||26.51||572||96.62%||23.51||13||2.2%||1.29|
|8||Edelweiss Tokio Life||189||11.57||180||95.24%||11.31||9||4.76%||0.26|
|10||Future Generali Life||1291||40.32||1202||93.11%||34.18||69||5.34%||4.14|
|11||HDFC Standard Life||12566||544.7||12289||97.80%||482.78||208||1.66%||46.78|
|12||ICICI Prudential Life||5491||274.17||5292||96.38%||248.16||154||2.8%||16.26|
|13||IDBI Federal Life||1161||50.51||1068||91.99%||45.15||87||7.49%||5.14|
|14||India First Life||1810||57.62||1626||89.83%||45.97||181||10.00%||8.06|
|15||Kotak Mahindra Life||3074||134.45||2881||93.72%||119.5||175||5.69%||12.26|
|17||PNB Met Life||4089||217.97||3726||91.12%||179.6||329||8.05%||33.02|
|18||Reliance Nippon Life||8987||173.66||8553||95.17%||149.54||403||4.48%||22.32|
|22||Star Union Dai-ichi Life||1241||52.29||1145||92.26%||43.42||81||6.53%||6.6|
|23||Tata AIA Life||2850||140.25||2793||98.00%||131.84||57||2.00%||8.41|
|24||LIC of India||739082||11379.4||724596||98.04%||10747.53||4958||0.67%||194.73|
|Green color= Indicates the claim settlement ratio of 96% and above|
|Yellow Color=Indicates the claim settlement ratio above 90% to below 96%|
|Red Color=Indicates the claim settlement ratio of below 90%|
From the above table, top 10 insurance companies which are marked in green settled down their claims better. These companies are best for buying term insurance policies.
Performance of Insurance Companies with respect to Claim Settlement Ratios:
5. Tele-medical Examination
Never go for telemedical examination. It may be considered to be the easiest process for you and your insurance companies. But in future insurance companies may find 1000 reasons to reject the claim on a health basis.
6. Don’t hide your health issues and habits you have
One of the worst things people do while purchasing the term plan is to hide the fact that you are a smoker or an alcoholic. Please don’t do that.
Your premium calculation will be based on this information, if you hide or lie then later there is a chance that insurance company may reject your claims.
7. Are you one who is excited about term insurance plan riders?
If so, please don’t get overexcited by term insurance plan riders. At times, investors choose riders just because it is available. Please check do you really need those riders.
Because riders come with an additional cost. So you need to make sure that it is adding real value to you or not.
Riders are mainly for those people whose life is highly risk-oriented.
For example, Let us take Mahesh. He is working as a Marketing executive in Bangalore. He needs to travel quite a lot of places in his professional life. So, the chances that he may die by accident is little higher hence he can choose accidental death benefit rider to avail the additional benefit.
- If your family has a history of critical illness, then a critical illness rider is must for you.
- If you are the sole breadwinner of the family, then Income Benefit rider will support your family with regular income.
Hence, you need to consciously decide about buying a term insurance plan with riders or without riders.
8. Buy Term insurance plan till your retirement
A term insurance policy is one of the most cost-effective methods that provide financial support to one’s dependents and family in his/her absence. It’s a well-known fact! Isn’t it?
The primary objective is to act as an income replacement tool. It eliminates financial burden on a family in case of an untimely death of the earning member. Hence, it is necessary that you should not buy term insurance for a longest tenure i.e, if you are at age 30, you don’t have to buy term insurance till 80 years.
You only need to buy a term insurance plan until your retirement and not beyond that. After your retirement, there will not be any financial loss in case of any mishappening to you. So, you can limit the period of your term insurance plan to your retirement age.
9. Better to purchase earlier
Earlier if we purchase term insurance, better it will be. The moment you satisfy the below two conditions, you need to go for a term insurance plan:
- i) You earn income.
ii) You have dependents.
Do not be very late to buy a term plan because as time passes, your premium amount will also increase depending on your age and health conditions.
Once you are clear that you require a certain amount of life cover, go ahead and complete the action as soon as possible. Otherwise, in case of any unfortunate mishappening to you, your family will financially suffer.
10. Don’t take small insurance cover
Term insurance would be suitable for a person with low income and also a person who is a sole breadwinner in the family and has a moderate or high income. But the important thing is, people should take a policy with a large insurance cover.
Taking a policy for a few lakhs will not be generally sufficient. I have seen people taking term insurance for an amount which is less than their annual income. In case of any mishappening to you, do you expect your family to manage with an amount just equals to your one-year annual income? So based on your current and future earning potential, you need to choose your term insurance plan.
Because that helps your family’s financial future in case of your unexpected demise. It helps them to pay your debts, take care of your kid's education, marriage etc.
Private Insurance Companies: Are they trustworthy?
Based on advantages and the operation procedure of a private insurance company given below, you will be able to figure out by yourself about their trustworthiness and it will also help you to make an informed decision whenever you plan to purchase them.
Advantages of Private Insurance Companies as compared to the Public Insurance Company:
- Offers 24*7 Customer Services.
- Quick Claim Settlement
- Flexibility to track claim status.
- Purchase and renewal of most of the policies can be done online.
Operates under the strict guidelines of IRDAI:
Insurance Regulation and Development Authority of India (IRDAI) is the most competitive and diligent regulatory body which governs and monitor various aspects of the Insurance industry. It has strict guidelines for both public and private companies, which have to be followed by all insurance companies (public and private).
IRDAI is responsible for:
- The formation of Private Insurance Companies
- Conducting regular audits
- Regulation of exit of Private Insurance Company
One primary requirement for a Private Insurance Company is to deposit Rs. 100 crores to IRDAI as their entry cost. Such high entry costs avoid fraudulent and small players to start a private insurance company.
IRDAI conducts regular audits and inspections of every insurance company on a regular basis to keep a proper check on their functioning.
IRDAI monitors essential indicators such as Claim Settlement Ratio, Claim Repudiation, and Claim pending records. These indicators shed light on claim settlement practice of insurance companies.
The entry of any new player is tough, but exit is made next to impossible by strict regulations of IRDAI.
According to IRDAI guidelines, if a company cannot continue functioning due to some unavoidable reasons, it is supposed to be merged with the existing Insurance Company of their choice. So that the customers of the existing company are not left astray and feel cheated.
In case of any complaints and disputes, a policyholder can approach the Insurance Ombudsman. Their job is to settle the consumer’s grievances in the most efficient and cost-effective manner.
Term Insurance Policies Vs other Insurance policies
Traditional Policies (Endowment insurance)
The returns from traditional policies are very less. It is better to go for a combination of term insurance and PPF instead of traditional policies.
Instead of going for an endowment plan with a sum assured Rs. 10 Lacs for a premium of Rs. 70000 for 15 years, the investor can opt for a term plan with 10 lacs sum assured for a premium of Rs.1500 and the balance Rs. 68500 can be invested in PPF.
Please remember, the bonus from insurance policies are of future value and will not have compounding benefit.
When a person dies in the earlier years of taking a policy, the beneficiary will get only the sum assured.
When you go for a combination of term insurance plan and PPF, in case of death, the beneficiary will get the sum assured from term plan and the accumulated money from PPF contributions.
So term insurance plan and PPF combination will give investors more benefit in both the situations of death and survival.
Also, the contribution to your PPF account is flexible. Based on funds availability you can increase or reduce your contributions every year.
Term plus SIP is better than ULIP
Ulips have a complex way of charging fees to investors. They charge under multiple heads like policy administration charges, premium allocation charges, mortality charges…
Mutual Funds follow a very transparent way of charging fees. They charge only exit load and fund management charges. These charges are very clearly mentioned in the SID. These charges are easy to understand even for a layman.
If you want to revamp your ULIP from one company to another company the exit and entry costs will be higher. In Mutual funds, the exit load is only 1% ( and that too if you withdraw before 1 year of your investment) and there is no entry cost.
Because of these factors, it is better to invest in a combination of Term insurance and SIP instead of ULIPs.
Challenges in other plans:
- Other policies such as ULIP and endowment usually charge more premium than Term plan. Term plan has the cheapest premium as compared to other plans.
- Other plans have certain costs like commission are charged throughout the policy which will be higher as compared to term insurance.
- Term insurance is flexible that it can be canceled easily at any time if needed.
- Term plan is much easier to understand than other insurance plans such as endowment plan which combine risk cover with savings.
- Premium paid for term insurance is much less and eligible for tax benefits under Sec 80C, than endowment policy.
Choosing a term plan is a very good decision because it helps to secure the financial needs of your family after your demise. Also, it is very affordable since the premium is very less under this policy.
Private Insurance companies are equally trustworthy as Public Insurance Companies as both are regulated by IRDAI guidelines equally.
Overall, Term insurance policy ensures security, protection, and peace of mind for your family.
You can also opt this term insurance plan with a combination of PPF and SIP which may help you to get more returns on maturity.