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Term
Insurance
Buying Guide
Looking to secure your wife’s and children’s financial future? Read on

Term Insurance Buying Guide 1

 Contents
Chapter 1 Introduction
Myth busted: You have life insurance but not term
insurance. Term plans offer high cover at substantially
lower premiums than other types of insurance.

Chapter 2 Do You Need Term Insurance?

You must adequately insure yourself if your demise will
cause financial hardship to your loved ones.

Chapter 3 Are You Buying the Right Term

Insurance?
It is prudent to opt for a product that is fairly-priced,
however one must remember that cheap does not mean
the best.

Chapter 4 How Much Term Cover Do You Need?

T humb rule says to have a life cover equivalent to 10-12
times your annual income. But there is more to it.

Chapter 5 Are You Choosing the Right Payout

Option?

Buying an adequate term cover is not sufficient to
financially protect your loved ones. Selecting the right
payout option is equally important.

2 Term Insurance Buying Guide

 Chapter 1

Introduction
Myth busted: You have life insurance but not term insurance. Term plans offer
high cover at substantially lower premiums than other types of insurance.

The purpose of term insurance is to cover the finan- of life insurance, term plans are able to offer a high
cial aspect of risk. It is essential that the family’s insurance coverage at premiums substantially lower
breadwinner buys adequate term insurance to secure than other types of insurance.
the financial future of the family. The way to go
about it is to calculate how much insurance cover How to buy a term plan online?
you need and then buy a good term insurance of Buying online is the preferred way among buyers
that amount. and we also recommend that one should buy a term
plan directly from an insurance company’s website.
What is term insurance? The online plans are cheaper than the offline ones
Term insurance is a basic and the simplest form of as the insurance company does not have to pay any
life insurance which pays the insurance amount commissions to the agent, a benefit which they pass
known as Sum Assured to the beneficiary/nominee on to the consumers in the form of lower premiums.
in case the insured dies. The insured has to pay a A policy bought online or offline is a contract with
premium towards the policy which can be paid in the insurance company and the claims are processed
quarterly, monthly or annual instalments. Annual by the company itself.
and monthly options are the most preferred
among buyers. A term plan does not Process to buy online
pay back any amount if the 1. Go to insurance company’s
insured survives through website. Select the online
the tenure of the plan you wish to
policy. Being the purchase.
cheapest form 2. You will be

Term Insurance Buying Guide 3

What is term insurance?

Pays sum assured

Pays annual in case of death
premium of the insured

The insured Insurance company Nominee(s)

(Breadwinner) (Financial dependents)

Claims are processed by the claims department of an insurance company.

asked to enter personal details such as gender, your you an option to e-verify your identity and address
smoking habits, date of birth or age, policy term and by providing your Aadhaar number. This allows the
the amount of sum assured. On basis of these basic insurer to process your application and issue your
details the company provides you a policy faster since no separate documen-
premium quote. If you get stuck some- tation is required for address & identity
where, you can seek the help of the Online term proofs.
customer care team by calling them or
through the online chat facility.
plans are 4. Companies provide various options to
submit the required documents. You can
3. You need to fill other information cheaper and upload them on their website, email them
such as your employment details, health provide a or simply send them through whatsapp for
details, address along with nominee faster processing. Depending on your age,
details required by the company and longer Free- the insurance company may ask you to go
pay the premium through netbanking look period. through certain medical tests as well.
or other digital modes. Insurer provides

We recommend
l Calculate the required life cover using a detailed l If you smoke, even if only occasionally, make sure
need analysis as mentioned in Chapter-4. However, to disclose it correctly. Most insurance companies
as a thumb rule, it should be at least 10-12 times of consider you a non-smoker only if you haven’t
your annual income. Also, do not round off the cover. smoked at all in the last 5 years.
Every penny of life cover is important. l Make full disclosures of any existing and previous
l Your policy should remain in force till the time you are medical conditions. If any material fact is not
earning, i.e., till the age of 60-65 years. Choose the disclosed, the insurance company may repudiate any
policy term accordingly. claim arising out of the insurance policy on the basis
l Annual premiums are usually cheaper than monthly of  non disclosure.
premiums because of loading. l Keep your PAN/AADHAAR handy while filling the form.
l Choose the payout option that best suits your Aadhaar card alone is enough for age, identity and
requirement. Income payout option comes at a lower address proof.
premium.

4 Term Insurance Buying Guide

Free-look period for premium payments on time. Your policy may
This is the biggest advantage of buying online. Apart lapse if you do not pay your premiums on time,
from discounts on premiums, policy holders also get exposing your family to financial risk. Insurance
30 days free-look period. A lot of policyholders don’t companies provide a 15-30 days grace period to
realize that they have the option of cancelling their revive the policy in case you forget to pay the premi-
online policy within the first 30 days of its com- um on or before the due date. If policyholder fails to
mencement if they feel that it doesn’t suit them. The pay the premium within the grace period, the policy
insurance company will be liable to refund the pre- shall lapse without any value.
miums paid after deducting the expenses incurred
towards stamp duty, medical examina- Exclusions
tion, etc. Therefore, make sure If the insured, whether sane or insane,
to study your policy document commits suicide within one year from
thoroughly during the free- the date of commencement of policy,
look period. the insurance company forfeits
the death benefit. However,
Premium some insurance companies
payment may reimburse the premiums
It is extremely im- paid till date after deducting
portant to pay your expenses incurred by the
renewal premiums company.
on time to keep
your policy Tax deduction
in force. You Premiums paid towards
should set remind- term plans and critical
ers for premium payment or illness rider are eligible for deduction under
you may consider setting up standing instructions Section 80C and 80D of Income Tax Act 1961.

Steps to buy insurance online

Select a plan Fill up the required Upload documents: Photo, Pay premium
on insurer’s website: information: Many age proof, identity proof, online: Choose the
A plan could be a companies have made address proof and frequency of paying
plain vanilla term online form filling quite income proof. premiums (monthly/
plan or a term plan user friendly. It has now quarterly/yearly) as
with critical illness or become much easier to per your budget and
accidental benefits. buy on mobile devices. suitability.

Term Insurance Buying Guide 5

 Chapter 2

Do You Need
Term Insurance?
You must adequately insure yourself if your demise will
cause financial hardship to your loved ones.

Life insurance isn’t needed for everyone at every stage cause financial hardship to someone - your parents,
of life. You do not need life insurance if you do not spouse or children.
have any financial dependants. On the contrary, you Here’s a broad framework to think about your insur-
must adequately insure yourself if your demise will ance needs at different stages of life.

6 Term Insurance Buying Guide

Single with no dependants Second innings
Do you need life insurance Retirement - that time in life
if you are single and have no when you hang up your boots
dependants? The answer is and watch the sun set. You
no. If you have dependants take up the hobby you always
such as aged parents then the wanted to pursue, move to a
situation is different and you can consider buying hill-station or just spoil your grandkids silly. At this
life insurance. juncture, you are typically living off a pension or your
Life insurance need: None, except in case of dependants. savings and you need to think of the immediate rather
You should consider buying it in the next one year. than the distant future. This is not the time to buy life
insurance unless you have a spouse, children or grand-
Dual income with no kids children who are dependent on you financially. Also
With double income and no don’t forget that the premiums increase dramatically
dependants, sometimes you with age.
have more money than ways Life insurance Need: Moderate, if there are dependants.
to spend it. Whatever the
lifestyle, you do not ordinarily Do you need term insurance if you are
need life insurance unless there is a substantial ine- an SIP investor?
quality of earnings between the spouses or outstand- You should buy Term Insur-
ing liabilities such as credit card bills, mortgages, ance Plan (TIP) even before
and car loans. you start investing through a
Life insurance need: Moderate, if there is a substantial Systematic Investment Plan
inequality of income and/or outstanding liabilities. Buy it in (SIP) if you have financial
the next three months. dependants.
The size of the term
Just married or have been married insurance cover should
Does your family consists of be decided carefully.
a breadwinner and a home- It depends on many
maker? Such a family usually factors such as your annu-
depends on the sole breadwin- al income, your family’s
ner’s income and is vulnerable monthly expenditure, their
to the loss of that income. goals and your age, among others. Read more on this
Life insurance need: Very high. You should consider buying it in Chapter 4 where we explain how you should go
immediately. about estimating your term cover. Consider the two
simple ‘Rules of 10’. One, for every 100 rupees of
Young parents or have been parent for a SIP, spend 10 rupees on TIP. Two, ensure that the life
while insurance cover you get from your TIP is about 10
Mothers often take a break times of your annual income.
from work for periods ranging Let’s look at a quick example. Say you have an
from a few months to several annual income of `5 lakh and you do a monthly SIP
years. Sometimes this entails of `5,000. According to the two Rules of 10, either
a complete change in the role your life insurance cover should be `50 lakh or your
to that of a homemaker. This can result in the family TIP should be `500 per month. Simple, isn’t it?
being largely or wholly dependent on the earnings
of the husband and hence vulnerable to a steep drop
in those earnings. There’s also the cost of raising a
child - toys, books, schooling - which goes up with
inflation. If you are just married or have recently become a
Life insurance Need:  Very high. Consider buying it parent, you must buy term insurance today.
immediately.

Term Insurance Buying Guide 7

 Chapter 3

Are You Buying the

Right Term Insurance?
It is prudent to opt for a product that is fairly-priced, however
one must remember that cheap does not mean the best.

One must compare the prices of policies from differ- Some policyholders may find it more convenient to
ent insurers and their claim settlement ratios. Some pay the premiums at a monthly frequency. One must
policies provide discounts on higher sums assured or explore the options available to choose the most suita-
charge lesser premiums from women. But do ensure ble one. Monthly premium option is generally costlier
that discounts offered are genuine and not compelling than the annual one because of loading.
propositions.
What should be the policy term?
Is a cheap policy always good to select? Before buying any term insurance plan, an individual
It is prudent to opt for a product that is fairly-priced, must assess the time left to retire. Time remaining to
however one must remember that cheap does not retire here does not necessarily mean retirement from
mean the best. You must scan all term insurance your job, it means the time period till your fami-
plans and pick a policy that offers pure life insur- ly members will depend on you for their financial
ance at a bargain. You may consider the monthly needs. Once you know the number of years for which
premium payment option if paying in one you have to stand as the financial support, look out
go is difficult for you, but don’t settle for policies that offer the matching policy term and
for a cheap plan if it doesn’t meet maturity age.
your requirements. For instance if you plan to retire after 20
Term insurance policies are years, make sure that you take a minimum
associated with level premiums or policy term of 20 years. It is fundamentally
increasing premiums depending on important to be insured at least till you pass
the type of policy and the insur- on the baton to another family member.
ance company. In term insurance
policies the mortality risk of the Will the insurance company be
insured increases year by year and there to honor the claim?
therefore the cost of insurance also When choosing a life insurance company it is
increases yearly. Consequently, a good idea to make sure that it has financial
the premium chargeable also in- strength and longevity. You want to make
creases annually. However, in many sure that the company is going to be
term policies the insurer averages out around later in life when you need it.
the premium chargeable over the entire policy The insurer you choose must have
period to keep it constant throughout. But some the credibility and integrity to
insurance companies may have a clause to revise fulfil this promise.
the premium every 5 years. Choose a plan that comes

8 Term Insurance Buying Guide

 What you need to
consider while Is it a credible
Is the plan choosing a company?
competitively Does it have a
priced? term plan? good claim set-
tlement ratio?

Whether the plan

Availability of
provides a policy
any rider or
term equivalent to
the provision
your remaining
of MWP Act.
working life?

from a highly credible company. Claim Settlement Ra- Are the right riders available?
tio is a good way to gauge this. Claims settlement ratio A term insurance rider is an additional benefit in a
is the total number of death claims approved by an term insurance policy that gives you supplementary
insurance company, divided by the total no. of death coverage. Such riders give additional benefits apart
claims received by it. from the core life cover which pays only the death
However, since the Insurance Act prohibits denial of the policyholder. Some of the important riders to
of claims after three years except in cases of fraud, consider are as follows:
it is advisable to look beyond the Claim Settlement Accidental Death Benefit Rider: Accidental Death Benefit
Ratio and also consider factors such as claim amount rider pays an additional sum to the nominee in case
settled ratio, corporate governance record, solvency the insured dies in an accident. The rider is extremely
ratio, assets under management (AUM) and instances cheap to buy and usually provides a cover equivalent
of violations of IRDAI norms. Claim Paying Ability to the sum assured under the term plan.
(CPA) ratings & CRISIL rating may be useful. Critical Illness Cover: A critical illness benefit pays a
lumpsum with no sub limits or conditions if a speci-
Is there a provision of MWP Act? fied illness is diagnosed. In some plans the rider may
Married Women’s Property (MWP) Act, 1874 enables pay you only a portion of the sum assured. It is im-
a married man to protect an insurance policy only for portant to look a little deeper (survival period clause
the benefit of his wife and/or children. In case of a and illnesses covered) into this benefit with the rise in
death claim, the policy proceeds are received by the lifestyle diseases.
trust and can only be claimed by trustees (wife and/or Waiver of Premium: The policyholder is not required to
children). It cannot be claimed by creditors, relatives pay future premiums on the policy in the event of an
or form a part of the will (estate of the proposer). accident or mishap as defined by the rider. In such
For instance, if you are a salaried person with a cases, the future premiums get waived off but your
home/personal loan or the owner of a business and policy remains in force.
have accumulated debts, your creditors will have the
first claim on your policy proceeds in the event of
your death. When you buy a term insurance online
under MWP Act, your wife and/or children will be
the only ones who will have access to the claim
Don’t unnecessarily take a term plan with high
amount – enabling you to secure their future
cover or a longer policy term.
financially.

Term Insurance Buying Guide 9

 Chapter 4

How Much Term

Cover Do You Need?
Thumb rule says to have a life cover equivalent to 10-12 times of
your annual income. But there is more to it.

When faced with the prospect of figuring out how account. Let’s illustrate with an example - Suppose
much insurance to buy, most people pluck a figure you would need `20 lakh in today’s value
out of the air--something that just seems adequate. on your child’s marriage,
This is not the way to make this important decision. assuming you have
The ideal way of making this decision is to
unemotionally create a financial plan that your
family should follow if you die suddenly. Here
are some heads to consider.
Loans and debts: As far as possible, take debt-
ors’ insurance so that your debts can be paid
off straightaway. If you have a housing loan,
the lender has probably made sure that you
already have such insurance for that loan.
Other loans need to be considered. While you
can add these to your main term insurance,
taking a policy where the insurance company
will directly pay off lenders has the advan-
tage that your survivors will not be tempt-
ed to carry the loans.
Do not waste money in insuring unse-
cured personal debt like that for credit
card. The card issuer cannot make your
family pay so there’s no need to cover
that, unlike say, vehicle loans where
you wouldn’t want the family car to
be possessed by the lender.
Future Expenses: The hardest part of
providing for future expenses such
as higher studies of children,
daughter’s marriage, etc. is
estimating and allowing for
inflation. Take a reasonable,
at least 7%, inflation rate into

10 Term Insurance Buying Guide

10 years to the event and 7% rate of inflation, you prospective insured.
would need an inflation-adjusted sum of `39 If you find the above process to calculate
lakh after 10 years. You can calculate this the required cover too cumber-
future value using the formula some, there is an easy way.
FV = PV*(1+R/100)^N where, A widely used thumb rule to
FV is Future Value estimate the ideal life cover says
PV is Present Value that you should have a life cover
R is rate of inflation equivalent to 10-12 times of your
N is number of years to goal annual income. For example, if
Education: Insurance com- your annual income is `9 lakh,
panies are making some you should have a life cover of
attempts at designing `1.08 crore (`9 lakh X 12). Here,
policies that will the insurance cover should not be
ensure that your rounded off to `1 crore as it would
children’s education lead to under insurance by `8 lakh.
is paid for. What you It is believed that an amount equiv-
ideally need is a pol- alent to 10-12 times of your annual
icy that is conceptu- income should be sufficient to
ally term insurance, take care of your dependants.
that is, which does However, this thumb rule
not have any payout is only meant to give you an
if your children get estimate and does not give
educated during your you an accurate figure.
lifetime. Most insurance companies
Living Expenses: Estimate what living ex- provide a ‘Human Life Value’ calculator on

CALCULATE YOUR SUM INSURED: Thumb Rule

A. Loans and other debt Term Cover = 10-12 times of your annual income
B. Future expenses/living expenses of family
adjusted for inflation.
C. Saving and investments
their website to ease the task of calculations as it is
Formula = (A + B) - C very important to find out an ideal cover. It is better
to be over insured rather than being under insured.

penses are going to be and estimate the investment

needed to yield that much return. Your term insur-
ance should be for this amount. Make a realistic
financial plan and not an idealised one.
Sum assured should be based on current lifestyle,
annual family income, annual expenses, current Do not round off your life cover to `1 crore or
investments (if any) and liabilities like home loan `50 lakh. Every single penny is important in
or education loan overhead. The final value after case of death.
considering these figures will be the life value of

Term Insurance Buying Guide 11

 Chapter 5

Are You Choosing the

Right Payout Option?
Buying an adequate term cover is not sufficient to financially protect your
loved ones. Selecting the right payout option is equally important.

Earlier, payouts used to happen only in lumpsum. But which you want to stagger the payout.
these days, insurance companies offer several options This option should appeal to those who want to
to choose from. Different firms may call them by dif- provide for the living expenses of their financial
ferent names but in essence they are more or less the dependants post their demise, without entrusting the
same. Here’s a primer. job of managing the money with the nominee. It has
the added advantage of lowest premiums in compari-
Lumpsum son to the other two payout options.
As the name suggests, the entire death benefit is paid
to the nominee in lumpsum at one go. This option
would work well if the nominee can carefully manage
the money so received to fill the financial vacuum
created by the demise of the insured, be it to meet the
family’s living expenses or any other
goals. In fact, a financially literate
nominee may be able to derive better
returns by wisely investing the lump-
sum payout than what is implicit in the
payouts of other two options. But if that’s
not the case, you may consider the other two payout
options because the very purpose of buying insurance
will get defeated if the nominee ends up squandering
the money received in lumpsum.

Monthly income option

In this option, the death benefit is paid in equal
monthly instalments over your chosen period,
say 10-15 years. For example, a term plan of `50
lakh with a monthly income payout option
may pay around `40,000 to `50,000 every
month for the next 10 years. These are
indicative numbers and the actual payouts
may differ from plan to plan and de-
pending upon the number of years over

12 Term Insurance Buying Guide

 Here’s how the four payout options differ in case of a 30-year term insurance plan with sum
assured of `50 lakh for a 30 years old healthy man.

Payout option

Increasing Lumpsum +
Lumpsum Monthly income monthly income Monthly income

Payout `50 lakh in `40,000 to Starts with `42,000 per `5 lakh in lumpsum followed
lumpsum `50,000 per month; Keeps increas- by about `42,000 per month
month for 10 years ing by 10% every year for 9 years starting after one
for 10 years year of the insured’s death.

Annual premium `6,200 `5,200 `7,800 `5,200

(approximate)

Increasing monthly income Lumpsum+Monthly income

Almost similar to the monthly income option, ex- This is a combination of the lumpsum and monthly
cept that the monthly payouts increase every year income options. Here the nominee would receive
at a pre-determined rate mentioned in the policy a specified portion, say 10 per cent, of the sum as-
document. For example, the payout may be `42,000 sured as a lumpsum immediately on the demise of
per month in the first year, which increases by 10 insured. This can help him/her to pay off outstand-
per cent to around `46,000 per month in the second ing debts or any other immediate expenses which
year and further to `50,600 in the third, and so on. might occur. The balance of the sum assured is paid
This makes a lot of sense as the living expenses keep in equal or increasing monthly payouts. For exam-
increasing with inflation over a period of time. There- ple, a 30 year policy with `50 lakh cover may pay
fore, what looks like an adequate monthly income `5 lakh (10 per cent) as a lumpsum immediately on
today may not be so a few years hence. But note that death and `40,000 to `50,000 every month for the
this is also the costliest payout option since the pre- next year 9 years.
miums you have to pay are the highest here.

Tips to fill online

application form quickly We recommend
l Go for the lumpsum payout if the nominee can
deftly manage the money received as death
l Keep your Aadhar and mobile registered with benefit.
UIDAI handy. It would pre-populate the form
with most of your details. l Monthly income will suit those who don’t want
to leave the job of managing the money to the
l Take a note of your height, weight and medical nominee. Go for increasing monthly income if you
history. The form will ask for it. Also, you might don’t mind paying the extra premium.
have to undergo certain medical tests before
the policy is issued. l Choose lumpsum + monthly income option if you
want your nominee to receive a partial amount
l Scan your PAN, latest salary slips and Form as lumpsum to take care of the immediate
16. You might have to upload them as income needs followed by a monthly income for recurring
proofs. expenses.

Term Insurance Buying Guide 13

 Summary
l You must buy life insurance including any existing
if you have financial de- medical conditions. Else,
pendents. the insurance company may
forfeit your policy.
l Term insurance is the best
and the only form of life l Buying insurance online
insurance you need. directly from the insurance
company’s website is a pre-
l Carefully estimate the
ferred way as it is cheaper
amount of insurance you
than buying it offline.
need depending upon your
annual income, your fam- l Buy your policy under
ily’s monthly expenditure, MWP Act to ensure that
their goals, etc. As a thumb nobody else other than the
rule, it should be at least nominee can stake a claim
10-12 times of your annual to the payout in case of your
income. death.
l Ideally, the policy term l Choose the payout option
should last till the time you that best suits your require-
expect to earn. ment. Go for the lumpsum
option if the nominee can
l Provide full and correct
deftly manage the money
disclosures in all respects,
received as death benefit.

14 Term Insurance Buying Guide