How to Choose the Best Term Insurance Policy for You- Part 1

People have started realizing the importance of term and health insurance after the current crisis of COVID-19. When people search for term insurance, the first question which comes in everybody`s mind is whether my term insurance claim will be settled if some unfortunate event happens to me. There are other questions too like

1. Till what age should I have insurance cover? Can it be till age 60 or 80 or 99?
2. Should I purchase riders like accidental death benefit or critical illness with the term insurance policy as rider?
3. Should I go for limited premium payment option or regular one and pay premium every year?
4. Should I opt Return of Premium policy (ROP)?

Before discussing how to choose the best term insurance for you, let us see what you should not do while purchasing term insurance cover? Many of your problems would be solved if you know what to avoid while purchasing a term insurance plan?

Things to avoid while purchasing term insurance cover

Term Insurance Cover till age 85 years

Suppose you are aged 35 and decided to purchase term insurance cover of 1 Crore till age 60 but as you were checking the premium, you also decided to check premium till age 85.

The immediate thought which comes to everyone`s mind is why not to purchase till age 85 years as there is hardly any difference in premium. Why not to leave a legacy to my family?

Premium for 1 Crore Cover till age – 60:  14,361

Premium for 1 Crore Cover till age – 85:  29,102

Difference in Premium -14,741. You are paying more than double the premium if you are opting for cover till age 85!

The basic psychology for taking term insurance till age 85 is only one – my family will get atleast 1 Crore whenever I die. And I am certain that I will die by age 85 years!

Suppose you die at age 70, do you know what would be the value of 100 Lakhs in today`s cost assuming inflation of 6% (after 35 years)

It is 13 Lakhs. So, you are not leaving a legacy of 100 Lakhs to your dependents. It is just 13 Lakhs!

If you die at age 80, the value would be 7 Lakhs

And to leave this legacy of 13/7 Lakhs, you would be continuously paying the premium to insurance company i.e. you will be one of the contributors to increase the profitability of the company.

Also Download- Life Insurance and Health Insurance E- Book

Should I purchase riders like accidental death benefit or critical illness with the term insurance policy or purchase separate personal accident & critical illness policy?

Accidental Death Benefits Rider

The major benefit of accidental rider is not the death benefit that is payable in case of death due to accident. It should be the disability benefits payable in case of accident.

Personal accident policies are purchased to secure the future in case of permanent disability. Imagine a scenario, where you met with an accident and are permanently disabled. You will not get the term insurance cover. Your medical expenses would be borne by the health insurance policy. What after that? How will you survive? What about the monthly expenses as you are permanently disabled and not able to work?

The second reason why personal accidental policies are purchased is Permanent Partial disability (PPD) and Temporary Total Disability cover (TTD) (like coma etc).

In most accidental rider in term insurance, both PPD and TTD are not covered. And there is no standard definition of permanent disability in term insurance policies.

ICICI Prudential Life insurance definition of Permanent Disability (PD)as is as follow (Do you think, anyone would be able to claim this?)

PD will be triggered if the Life Assured is unable to perform 3 out of the 6 following Activities of Daily Work:

• Mobility: The ability to walk a distance of 200 meters on flat ground.
• Bending: The ability to bend or kneel to touch the floor and straighten up again and the ability to get into a standard saloon car, and out again.
• Climbing: The ability to climb up a flight of 12 stairs and down again, using the handrail if needed.
• Lifting: The ability to pick up an object weighing 2kg at table height and hold for 60 seconds before replacing the object on the table.
• Writing: The manual dexterity to write legibly using a pen or pencil, or type using a desktop personal computer keyboard.
• Blindness – permanent and irreversible – Permanent and irreversible loss of sight to the extent that even when tested with the use of visual aids, vision is measured at 3/60 or worse in the better eye using a Snellen eye chart

So, it is better to purchase Separate Personal Accident Policy which covers all sorts of disability due to accident rather than riders along with Term Insurance Policy.

Critical Illness Policy

The problem with critical illness policy rider is the term/duration of the policy, when purchased as rider in term insurance policy. Normally, term insurance is suggested till age 60 but same cannot be said about critical illness policy and cancer policy.

Critical illness policy should have a cover of maximum term i.e. till you live.

This is a catch 22 situation here, I should not purchase term insurance beyond age 60 but critical illness policy should cover me through entire life.

The 2^nd problem comes in when you accumulate assets where you do not require term insurance any more. In that case, you can drop term insurance policy, but if riders are attached in the policy, you cannot drop it because the critical illness policy is attached to it as rider.

So it is better to purchase separate Critical Illness policy instead of rider along with term policy.

Regular Premium Payment Term or Limited Premium Term

Do you really think that you would be taking a better decision by paying limited premium for 5/10/20 years? Do you really believe that insurance companies will think of your benefit rather than theirs?

Limited premium policy is normally advised for business people who are not sure about their future income. For a regular salaried people, it is always better to go for regular premium and pay premium every year till age 60.  Do you want to know, why?

Suppose a person aged 35 years purchase a term insurance cover of 1 Crore till age 60 (policy term -25 years). Here is the difference between premium amount

Regular Premium for 25 years- 14,361

Limited Premium for 5 years – Rs. 53,254

Difference in premium – Rs. 38,893

(Quote from ICICI Pru Life)

If you invest difference in premium in simple recurring deposit for 5 years, at 6% interest rate, you will have 2.32 Lakhs at end of 5 years.  Interest on this 2.32 Lakhs is almost sufficient to pay the annual premium of 14361/-.

Tell me, who is in loss? You or the insurance company?

Return of Premium Plans (ROP)

Suppose a person aged 35 years purchase a term insurance cover of 1 Crore till age 60 (policy term – 25 years). Here is the difference between premium amount from normal term insurance and return of premium plan

Regular Premium for 25 years- 14,361 (ICICI iProtect Smart)

Return of premium plan – Rs. 26,903 (ICICI Pru IPS money back solution)

Difference in premium: 12,542.

So, if you survive till age 60, you will get 6.70 Lakhs amount as return of premium (Rs. 26903*25 years).

And if you invest difference in premium in debt instruments i.e. invest Rs. 12,542 for 25 years assuming 6% returns, the value at the end of 25 years would be Rs. 6.90 Lakhs.

And if you invest difference in premium in equity instruments i.e. invest Rs. 12,542 for 25 years assuming 10% returns, the value at the end of 25 years would be Rs. 12.30 Lakhs.

What do you think, should you go for ROP of premium plans?

Now, you know, what to avoid while purchasing term insurance policy. In part-2 of this article, we will see how to choose best term insurance plan for you. Till then

Stay Safe!