Term plan to secure future

If you are reading this, chances are that you have decided to buy a term plan. This is a good decision, especially if you have financial dependents. A term plan has the potential to adequately cover their long-term financial requirements by replacing your income in case something unfortunate were to happen to you.

A term insurance plan is a plain vanilla life protection cover that pays out a lump sum on the insured's demise. However, the term plan market has been evolving rapidly to accommodate the many needs of the discerning investor.

Term plans now have several riders, add-ons, and features that make them more attractive to buyers. But even to a financially-literate person, some of these features may seem hard to understand. So through this article, we will attempt to understand the many features of term plans.

Sum Assured
The sum assured is what makes term plans a must-have financial tool. Typically, you can need 10-20 times of your current annual income as sum assured. For example, if your current annual income is Rs 5 lakh, you can seek a cover worth Rs 1 crore. The sum assured can be paid either as a lump sum or as a monthly income, depending on what the insured person seeks.

Premium
For the coverage they provide, term plan premiums are low in comparison to other life insurance options such as endowment plans and Ulips. This is because the premium is used only towards mortality charges and don't serve any investment purpose. A 30-year-old salaried male earning Rs 5 lakh annually can avail a 20-year term plan cover of Rs 1 crore for premiums starting from Rs 6,400.

Claim Settlement Ratio
Claim settlement ratio (CSR) is the percentage of the total claims that an insurance provider honours. For example, if there have been 10 claims of which an insurance firm has settled nine, it has a CSR of 90 per cent. The higher the CSR, the better.

Tenure
You should opt for a term plan with the highest possible tenure. While you may have to pay a marginally higher premium for this, you will be saved the troubles of trying to buy a new insurance plan when you are older-and possibly less fitter.
Term plans are typically sold to individuals between the ages of 18 and 65. Term plans typically mature (they cease coverage) between the age of 70 and 80. The younger you are while taking a term plan, the longer the tenure you can avail.

Types Of Term Plans
A basic term plan offers a fixed lump sum decided at the application stage. These are called level plans. You also get variants. Term plans can have an increasing or decreasing sum assured, wherein the amount changes by a fixed percentage every year, subject to terms and conditions. Additionally, some term plans offer a return of premium upon the policy maturity. This is the only variant of the term plan with a maturity benefit.

Tax Benefits
Your premiums paid towards life insurance products can be used to claim tax deductions under Section 80C.

Riders & Add-ons
The scope of a basic term plan can be improved with the addition of features such as riders and add-ons.

1 Monthly income: Provides a fixed monthly income over and above the lump-sum. The income is a small percent of the sum assured and provided for a fixed number of years. It comes in an increasing income variant wherein the income increases by a fixed percentage till the end.

2 Accidental death & disability: It provides your nominee an additional pay-out if your death is caused by an accident. It can also pay you a part of the sum assured if you suffer from a permanent or temporary disability.

3 Critical illness rider: You will get a part of the sum assured if you are diagnosed with a critical illness listed in the policy.

4 Premium waiver rider: It will allow you to stop paying premium if you are diagnosed with a terminal illness, critical illness, or meet any other condition.

5 Terminal illness rider: If you are diagnosed with a terminal illness, your sum assured may be paid out immediately, subject to terms and conditions.

The writer is CEO, BankBazaar.com