Choosing best term insurance plan based on your need: All you should know

While decreasing sum assured and structured payout options are handy, most other variants serve little purpose

With increasing variants, even choosing a simple term plan can be confusing for many. Insurance companies have been adding more options to the plain vanilla term plan. Last week, Edelweiss Tokio Life Insurance introduced an option in which on the death of the policyholder, the spouse automatically gets the term plan.

In the Edelweiss Tokio Life Insurance’s new option, if a husband is the original policyholder, the wife gets 50 per cent of his cover or Rs 10 million, whichever is lower. The wife’s policy will last for whatever is the remaining policy term of her husband. “After the death of the husband, usually, the wife is the head of the family and takes care of all the financial matters. Many customers wanted, therefore, a cover for their wife,” says Subhrajit Mukhopadhyay, chief, and appointed actuary, Edelweiss Tokio Life Insurance.

Compared to a plain vanilla term plan, the premiums vary depending on the age of husband and wife and the policy term. But for the majority of the customers, the premium would be higher by 1-3 per cent only, according to Mukhopadhyay. As most insurers don’t provide cover to housewives, Edelweiss Tokio’s new variant comes in handy in this aspect. Financial planners, however, say that individuals should stick to the plain vanilla term plan unless there’s a need for specific cover. “The idea of a term plan is to provide a replacement for the income of the policyholder and to discharge the other financial liabilities. Insurers, therefore, don’t provide insurance to homemakers. If the wife is working, she should evaluate her coverage needs and accordingly buy the cover,” says Suresh Sadagopan, founder, Ladder7 Financial Advisories.
 

Most term plan variants serve little purpose. Insurers have also introduced joint life insurance where husband and wife get cover under one policy. The premiums for the spouse are also cheaper by 5-10 per cent. While this variant is economical, it’s also inflexible. If one of the two no longer has the insurance requirement, for example, the premium still remains the same.

Opting for a variant also means a person needs to shell out higher premiums. Take the return of premium as an example. Many policyholders are not comfortable with the fact that they don’t get anything back when they pay for a term plan. To address this concern, insurers started offering the return of premium. At the end of the policy tenure, the individual gets back the premium. For many insurers, the premiums for this option double. If you are paying a premium of, say, Rs 12,478 for a sum of Rs 1 million assured for a simple term plan, for a return of premium, you will need to pay Rs 24,351. If you buy a simple term plan and invest the differential (Rs 11,873), you will end up with a bigger corpus than what you receive at the end of the policy tenure.

Financial planners say that variants such as decreasing the sum assured or structured payout are still handy. If you have bought a house taking a loan, opting for a decreasing sum assured helps as the cover reduced with your liability. “The premiums are lower for decreasing the sum assured. The premium-paying term is also lower than the policy term,” says Anil Kumar Singh, chief actuarial officer, Aditya Birla Sun Life Insurance. For a 20-year policy, the premium-paying term would be up to 15 years.

In a structured payout plan, the insurer pays a lump sum on the death of the policyholder and also a monthly income for a pre-decided period. If the spouse is not financially savvy, monthly income plan can take care of the finances on the death of the bread earner.