How to choose a term life insurance plan

Term insurance plans were introduced with a very basic structure – the plan will offer a sum assured upon the death of the policyholder, will provide coverage till 65 years and premiums can be paid in only the annual mode. However, it started getting more complex, when more and more insurers started offering online term life insurance plans. Today there are – limited pay plans, increasing cover plans, staggered payout plans, return of premium plans and dozens of combinations. While this profusion of choices is good, it is also becoming a problem for most of us to decide which plan to buy.


In this blog we will tell you about the most important variables to consider to make the process of choosing a term insurance plan.


And, here are the 5 things to consider when buying a term life insurance plan.


Number 1: Calculate how much term insurance coverage you need:


Your term life insurance coverage should broadly assess how much money your family would need if you were to meet with an untimely death. The best way to do this is to grab a piece of paper and start calculating the following.


• One, estimate your dependent family’s monthly expenses and multiply it with 150. The multiple of 150 factors in future inflation.


• Two, add your liabilities on the account of home loan, personal loan, credit card bills.


• Three, deduct all the liquid assets you already have in the form of FDs, stocks or mutual funds.


• Four, add your expenses planned on the account of important life goals that are likely to happen in the next 15 years. Like your children’s higher studies or their marriage.


• Five, add the retirement corpus that you would want to leave for your spouse on his or her retirement.


Number 2: Determine the tenure of your plan:


Once you know how much coverage you need, it is important to know till what age you would need it for. The tenure should not be too little as the policy might lapse before your financial obligations are completed. At the same time, the tenure should not be too long because the premium charged would be too high on the account of the higher tenure.


The right way to estimate the tenure of your term life insurance plan is to determine by what year your liquid net worth, i.e. the total investment you have in mutual funds, provident fund, stock, etc after subtracting your liabilities, will be more than your term life insurance cover that we have calculated in the earlier section.


The age at which these two numbers coincide should be the age till which you need coverage. Post that, your assets will be enough to take care of your family in your absence.


Number 3: Target the highest Peace-of-Mind per rupee premium:


Here, we use the term Peace-of-Mind rather than coverage per rupee of premium because consumers often value some key intangibles while making a decision.


For choosing a term plan, these factors could be the stability of the insurance provider or its reputation in the eyes of the policyholder. Term life insurance is a long-term contract, often running for 30 to 50 years. Hence, it is important for you to be happy with your decision about the insurance plan you have picked, which would be a combination of the premium you pay and your perception about your insurance provider.



Number 4: Choose your add-ons wisely:


Term life insurance plans offer riders at a reasonable cost which should be certainly considered by you even if they might not fit your requirement.


There are four major riders that are available:


• Additional cover for death due to accident:

In case you die due to an accident during the policy tenure, this amount would be paid to you in addition to the basic sum assured.


• Cover for critical illness:

A lump sum amount is paid to the policyholder on being diagnosed with one of the diseases which has been mentioned as a critical illness in the policy by the insurer.


• Waiver of premium on disability:

If the policyholder becomes permanently disabled during the policy tenure, the future premiums for the policy would be waived off.


• Waiver of premium on critical illness:

If the policyholder is diagnosed with one of the critical illnesses mentioned in the policy during the policy tenure, the future premiums for the policy would be waived off.


Of the four riders, two riders, i.e. waiver of premium on disability and waiver of premium on critical illness, come at a low premium. The rider for critical illness cover is the most expensive. Hence, you have to run sum research to find out if the additional benefits match up with the premium charged. And read the fine print of all the add-ons as they tend to be different for different insurance companies.


Number 5: Broadly look at the claim settlement ratio:


Claim settlement ratio usually attracts a lot of consumer attention. It indicates the efficiency at which the policies are settled by the insurance company. So when you see the 95 percent in the claim-settlement ratio column, it means 95 out of the 100 claims reported to the insurance company were settled.


However a word of caution here. The claim settlement ratio is merely an indication. If the claim settlement ratio of a company is more than 95 percent, then the company has been very efficient about settling claims. You really don’t need to go much deeper into it to see who has 99, or who has a 98.5 percent ratio. You should consider the claim settlement ratio as a filter rather than a key decision-making criteria.




Term life insurance is a long term contract between you and your insurer, and it will benefit your family when you are not there. It is in your best interest to choose the right plan for your family by considering all the five factors discussed in the article.


Source: ETMoney

Share on social media