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The most essential life insurance plan

August 05, 2009 12:46 IST
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Haven't most of us met our favourite life insurance agent selling us insurance plans for our children, our retirement, our parents, our house and so on and so forth? Of course, we have.

And has any of the agents suggested a something called a term plan to us? If your answer is 'no', it is time we started looking for somebody else for our insurance requirements.

What is it?

Why is the term plan so important? Well, because it is the most basic of all plans. Term plans are products which are plain vanilla (no frills) that give us very high life covers for very low premiums.

But term plans do not give any thing back at the end of the term (life cover period) if you outlive it. Agents/sales persons de-sell these plans using this feature to tempt us to high premium plans that do give us something back.

However, term plans are able to give us high covers exactly because of this feature.

Most of the other insurance plans are built around the term plans or have the term plans as a part of them. As the features get added, the premium also increases.

However, often the premium increase is very steep as the commission (to the agent) and company charges increase as a percentage of the premium. This increases the premium rapidly in value terms.

Let us explain this with an example: 10% on Rs 100 is Rs 10 which most of us could afford. The same 10% on Rs 20,000 is Rs 2,000 which is a big amount for most of us.

Insurance buying scenarios

Since most of the agents/sales persons are taught to sell the cream (not the bread), we end up among any of the three following scenarios:

  • Take an insurance plan that we need but at premiums that we could not afford;
  • Take a plan that we do not really need;
  • Do not take any plan; effectively postponing a need.

The fourth possible scenario is to ask the sales person for a term plan.

Premium amount comparison

Let us compare term plans with one other product which also does not give anything back at the end of the term: vehicle insurance. Though the basic features and coverage are different, we find that the perspective obtained from the comparison is an eye opener for my clients and my training participants.

The two-wheeler full cover (third party + owner accident cover for Rs 100,000) insurance premium for a vehicle with Rs 35,000 value will come to about Rs 900 per year.

A four-wheeler full cover insurance premium for a vehicle with over 1500 CC engine capacity and current value of Rs 10,00,000 will cost about Rs 28,000 per year. (Less than 1500CC engine capacity could set us back by around Rs 20,000 per year.)

Compare that with the premium for a life cover of Rs 10,00,000 for a 35-year-old male. The premium here will come to only about Rs 4,300 per year.

Perspective compared to vehicle insurance

See the difference in rates? We take vehicle insurance because it is mandatory and the traffic policeman at the next corner may fine me for not having one. And anyway we don't get the premium back, unless there is an accident.

But for our own life, we don't take up a term plan (which costs only 17% that of our vehicle) because the plan does not give anything back! Common sense, where art thou? Do we love our car and bikes more than our family members? Or is it that we are so used to the policeman at the next corner that we have forgotten to think?

Jai Ho term plans

All life insurance companies in India have term plans in their bouquet of offerings. The rates are also quite competitive. So it really does not matter which company you take the cover from (IRDA has done a pretty good job at regulating the insurance companies -- all of them are safe). Based on your comfort level with the sales person and the previous experience with the company, you may choose to take your term plan.

There is no monetary value for peace of mind. For everything else do take a term insurance cover.

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