Term Plan Better Now

Pure term policies have become more attractive than earlier due to lower premiums offered by some insurance companies

The premium that pure term plans charge is the lowest among life cover policies as they provide only life insurance for a specified number of years. Term plans don’t offer any returns as they focus only on providing life cover and have no savings element. If you outlive the policy, you will not get anything, but if you die during the term of the plan, your nominees will get the sum assured. So, if your aim is not to use insurance as an investment avenue, but to only protect your dependents from a financial crisis in case you die prematurely, pure term is the product as it will serve your need at the lowest cost.

WHAT TO LOOK FOR WHILE BUYING TERM INSURANCE
As term plans don’t have any surrender or maturity value, purchase decisions are often based on premium. However, choice should be guided by other factors too.

Paying term. Limited PPT, in which a higher premium is paid for only a few initial years of the plan, can be a better option than paying premium every year if you want a big cover and can afford high premiums over the first few years. While limited PPT lowers the total premium outflow, it also prevents the policyholder from benefiting from falls in the premium in the future. The PPT advantage is also diluted if the policyholder dies early.

Duration. Unlike endowment plans, premium of term plans rises as its duration increases. However, life is uncertain and you should ideally choose a plan that covers you for long. Term cover can be dropped easily once financial responsibilities are over. It does not make sense, for instance, if a 30-year-old person buys a term plan for just 25 years.

Maturity age. If you expect to have dependents till late in your life, look for term plans that have a high maturity age. Most term plans provide coverage till age 60 or 65 years.

Top-ups. Some plans allow hikes in cover at regular intervals without any financial or medical underwriting. Higher incremental premiums may be required as age advances, but they may still prove helpful in circumventing age-related health problems. These annual hikes are capped, but even small increases at regular intervals add up to a neat overall rise. For instance, if a cover of Rs 10 lakh is increased by 5 per cent every year, the total cover would become Rs 15 lakh in 10 years.

WHY BUY EARLY
The right time to buy term cover is when one finds someone financially dependent on oneself. Apart from low premium, there are other reasons for purchasing a pure term cover early in life.

Health issues.
The health status of the person buying a term plan goes a long way in deciding the premium and even whether the policy would be issued to him at all. There are stringent medical tests and processes before a policy is issued. In some cases, extra premium is charged if the health reports do not fall within the insurer’s underwriting limits.

Saving the surplus.
Buy a term plan with adequate coverage to keep worries away. Once your life is protected, it will be possible for you to deploy your savings more efficiently. It will help if you choose the right instruments with the aim of creating wealth over the long term.

MORE TO COME
Premium is largely a function of mortality rate (number of deaths per thousand), the insurer’s expenses and interest rates. The mortality rate being used by all insurers is based on the 1994-96 mortality tables. Fall in mortality rate due to higher life expectancy will push premiums further down. Insurers can afford to charge less if policyholders pay premiums for longer periods on account of increase in average longevity. A recent US report records this. According to Insurance Information Institute, a US trade group, term cover premiums have fallen by 50 per cent over the past decade in the US. The reason cited for this is change in the mortality tables due to rise in life expectancy.

Though a similar situation is likely to develop in India too, you should not wait till it does to buy a term plan. When that happens, you can decrease your overall cost by buying more.

Note : This article is an extraction from another site.