Term life plans set to grow in coming years, say experts

Given Indian’s propensity for anything cheap, it is surprising that the uptake of term life insurance plans is low. But this segment is set to see more growth in the coming years, due to increasing awareness, ease of availability (very easy to buy online) and customer-friendly features such flexibility in premium payment and claims payout.

According to Chinmay Bade, vice-president, products at HDFC Life, India has the highest protection gap in Asia, as growth in savings and life insurance coverage has lagged behind the economic and wage growth. The protection gap has increased over four times in last 15 years, with significantly low insurance penetration and density.

Life insurance companies too have realised the importance of selling protection to aid growth in profitability. “With increasing awareness, though more people are buying term plans now as compared a decade ago, we are still nowhere close to the ideal levels. Maybe the scenario of an unexpected event in life and financial implications of the absence of the breadwinner doesn't cross people's minds,’’ said Bade.

Explaining the reason for the slow adoption of term plans, managing director and CEO of Aditya Birla Sun Life Insurance, Pankaj Razdan said, “Many people are just not aware of the importance and benefits of a term policy, while some do not see any ‘return on investment’ value in it.”

Term insurance provides a safety net for your family in the absence of the earning member, making it a must-have in your protection basket, said Rishi Srivastava, head –proprietary channel, product and marketing, TATA AIA Life Insurance. “Given the huge protection gap that India currently has, we expect the sum assured to significantly increase as individuals become aware of the true protection amount required,” he added.

Need for term plans

From a policy holder’s perspective, the primary concern would be around the replacement of income, repayment of an outstanding loan, expected future expenses, number of dependents in the family, important life events like children’s education, marriage, and living expenses, taking into cognisance inflation as well.

Ideally, a term plan should offer cover till as long as the policyholder is working in order to serve as an income replacement his/her absence. Hence, these are long-term policies of around 25-35 years tenure.

How to calculate sum assured

As a broad rule of thumb, it is recommended to have a cover of at least 10 times the annual income. The sum assured is based on the human life value that denotes the loss of income and increase in liabilities that the person’s family would have to face in case of the person passing away. The calculation takes into account the monetary value of the individual’s life based on his or her income, savings, and liabilities. It is also based on the current income and the policy holder’s age, and the sum assured is calculated as a multiple of the current income.

For instance, if you are between the age group of 25-40, the sum assured would be in the range of 25 times the current income. It would change as the age and income increase, Srivastava explained.

Some other factors to keep in mind while buying a term plan include services offered by the insurance company, claim settlement ratio, whether the paperwork is smooth, the premium payment options and so on.

Choose the option suitable for you

Today term plans offer multiple options for payment of the claim amount.

1. Regular term plan with lumpsum payout:

This option is good if the nominee (in most cases wife and children) is financially savvy. The payout should cover all long-term and short-term expenses. The family should ideally have recourse to or knowledge of various investment options on how to effectively invest the money so as to make it last as long as they need it.

2. Monthly income payout

In this case, some amount of the cover is paid upfront at the time of the policyholder’s death and the remaining is paid as monthly income. In some cases, there may not be any upfront payment. The monthly income could remain the same or it could increase, say by 5-10% every month, depending on inflation.

This option works for families where the nominees are not financially savvy but know how to manage their monthly expenses. “Since salaried people are used to getting a monthly income, the family is used to spending that amount. They may not know how to handle a Rs 1 crore lumpsum payout. But because they are used to getting an income every month, they know how to spend for various heads,’’ said Santosh Agarwal-head of life insurance, at Policybazaar.com.

3. Return of premium

In this case, the premiums are paid back if the policyholder is surviving when the policy matures. It is meant for people who want to get something in return for the amount they pay. But it is more expensive than a regular term plan. “Calculate if it is a better option to pay the higher premium or if you can earn more returns by splitting the additional premium into an investment and buying a regular term plan at a lower premium”, Agarwal advised.

4.Whole-life term plan

This works for people who want to leave something behind for their family. So although they retire at the age of 60 or 65 years, they continue to have a life cover for the rest of their lives. After their death, the sum assured is paid to their surviving family members. This too is more expensive than a regular plan.