Thursday, July 18, 2019 / 12:00PM / Policy Bazaar / Header Image Credit:
Over the years, the life insurance industry in India has grown tremendously. And it is likely to grow by 12-15% annually for the next 3 to 5 years, according to a 2019 Indian Insurance Industry Analysis report by IBEF.
In fact, a study conducted by market research firm Kantar IMRB and Max Life Insurance reveals that approximately 65% of India’s urban population has life insurance policies. But here’s the sad part: only 1 out of every 5 people have invested in term insurance plans.
The question is: Why is the penetration for term insurance so low in India?
There are multiple reasons for it. One of the most prominent reasons is lack of awareness. In their joint study, Kantar IMRB and Max Life Insurance found that only 44% of people were aware of the key facts of term insurance plans.
One of the most critical facets of term insurance plans is the policy period. In fact, a large number of people remain confused about the policy period when planning to buy a term insurance plan. No wonder, 17% of people often ignore buying term insurance plans.
After all, picking the right policy period could be really tricky. A shorter-term defeats the purpose of the policy, whereas a longer-term stipulates that policyholders end up paying more premium than they actually should.
Given the importance of the policy period when buying a term insurance plan to ensure iron-clad, financial protection for your loved ones, we’re going to pull the curtains and reveal the policy period you must look for when buying term insurance plans.
But before we jump guns, let’s quickly look at the definition of term life insurance plans for those who are planning to take a plunge in the world of financial planning.
A term insurance plan is the purest form of life insurance that provides death benefits to the nominees of the policy upon the premature or untimely death of the policyholder during the term of the policy, against fixed premium payment.
Term insurance plans make sure that the nominees of the policy are paid the sum assured, as the death benefit, upon the demise of the insured. The sum assured or the death benefit ensures that the nominees, as assigned by the insured, are able to take care of their household expenses, education expenses of kids, etc.
Term insurance is usually available for a maximum tenure of up to 75 years or 80 years. Recently, some insurers have started offering term insurance plans for even up to 100 years. The maximum entry age criteria of term insurance plans usually differ from insurer to insurer. In addition, term insurance plans are available for the tenure of 5 years to 40 years and it largely depends upon the age of the applicant.
Now, let’s look at the various factors that actually affect the premium rates for term insurance plans.
There are different factors that affect Term Insurance Premium. They are:
Typically, the premium for term insurance is largely dependent on the age of the applicant. Generally, applicants of lower age pay a lesser premium as against applicants of higher age bracket.
Gender also determines the premium of term insurance plans. Women tend to get term insurance plans with lower premium as compared to men since death risk for women is lower than that of men.
Sum assured of the plan also determines its premium amount. Those choosing the higher sum assured are required to pay a higher premium as compared to those choosing for lower sum assured.
Applicant’s lifestyle habits also determine the amount of premium for term insurance plans. For example, non-smokers get to pay a lower premium, whereas smokers end up making higher premium payments.
Premiums for term insurance plans are also determined by the payouts opted by the applicants. For example, premiums increase with time for term plans with increasing sum assured, whereas premium remains the same for term insurance plans with level sum assured.
The tenure of the policy or the policy term also determines the premium payment for term insurance plans. For term insurance plans with a longer-term, the premium is usually higher. This is because the duration of the protection being offered is higher.
Let’s move on to decode the right ‘term’ in term insurance plans.
Usually, most life insurance companies in India offer policy term ranging between 5 and 40 years. Applicants must choose to opt for a policy term after a careful analysis of the age they wish to retire at.
Let’s understand this with an example. Let’s assume, you’re 25 years old and you plan to retire at an age of 60 years. Then, it makes sense to opt for a policy term of 35 years. But here’s the deal: retirement age may widely differ for different people. While some plan to retire at 60, some continue to work till their early 70s. Therefore, it is only wise to understand the best policy term for different age groups.
Early 20s is the age bracket when most people start working. If you fall in this age bracket, you must choose to opt for 40 years coverage. Investing in term insurance at this age also means lower premium rates.
Those falling in this age bracket must look for a policy term of 35 to 40 years. Here, one must remember to carefully take into account the number of dependents and the total liabilities when investing in term insurance plans.
Those falling in this age bracket must look for policy terms of 20-25 years, depending on their intended age of retirement.
People falling in this age bracket may look for policy terms of 10 to 15 years depending upon their intended retirement age. In this age bracket, the frame of liabilities reduces dramatically as children grow up and are less dependent on parents.
So there you’ve it – how to identify the best ‘term’ for term insurance plans. Remember, before investing in a term insurance plan, carefully mull over your intended retirement age, your liabilities, and by when your liabilities will reduce. Once you’ve carefully considered these important pointers, you’ll easily be able to decide the best ‘term’ for your term insurance plan.