Pose a question to any advisor of an insurance company. "Which product delivers maximum value for money to a customer?" Pat comes the reply, "Term Insurance". Pose another question to the advisor: "Which product is the hardest to sell?" The reply is the same: "Term Insurance."
The reason for this paradoxical situation is simple. A typical Indian customer buys an insurance policy for the following reasons: tax breaks, investment and tax free income, long term savings and cash flow management.
'Protection', the core aim of insurance, figures nowhere in the picture. Says an insurance advisor: "Insurance is a measure to hedge the risk of death. But it is a possibility that is hard to reckon. Planning for your own death is very very distasteful and is avoided at all costs."
If you don't have that distaste for discussing death or have overcome it, then term insurance is for you. It is the purest form of insurance. A very low cost is paid to cover life for a specific term. If you survive the term, then you get nothing. There is nothing called 'maturity'. Consider this. If a 30-year old buys a cover for Rs. 10 lakh for 20 years, he will shell out Rs. 3000 (approx) a year for the cover. If he dies between the ages of 30 and 50, then his family will get Rs. 10 lakh immediately. Some of the products sold in this category are Birla Sunlife's Term Plan, LIC's Anmol Jeevan, HDFC Standard life's Term Policy and ICICIPru Lifeguard. In theory, premature death is a possibility; but no customer believes that it can be his fate. His heart says that he is certainly going to live up to a ripe old age of 80. His family will never get to see the insurance money. His payment of Rs. 3,000 year after year, totaling Rs. 60, 000, will simply go down the drain. Whatever for? The term product is rejected, and the advisor is unceremoniously packed off.
Well, insurance companies have found a way to deal with such obtuse customers. They have designed a product - 'Term Insurance with Return of Premium' to take care of the mindset of desiring something back at the end of the term.
'Term Insurance With Return of Premium (ROP) Plan' works the same way as a pure insurance policy. The only difference is that on maturity, the insurance company returns to the customer all the premiums that he has paid to secure his cover. An added sweetener is that the money received is tax-free. Going by the same example of a 30 year old male buying a policy for Rs.10 lakh in a policy with ROP, the premium will be higher i.e., approximately Rs. 8,500 a year. But after 20 years, if he is alive and kicking, he will get Rs. 8500*20 = Rs. 1,70,000 back tax-free. The premium will vary across insurance companies.
The actual yield is negative on the above but the fact, which meets customer's approval, is that he got his 'capital' i.e., (premium paid) back. There are quite a few products in this category. LIC's New Bima Kiran comes with a built in extended life cover for 10 years. Birla Sunlife's Premium Back Term Plan comes with two variants - 100 per cent premium back on maturity or 125 per cent premium back on maturity. In ICICIPru Lifeguard (With ROP) an accident and disability benefit can be attached.
Are there other variants in term insurance?
Yes, there are.
• Single Premium Term Insurance: Pay the premium only once as a lump sum and forget about it. HDFC Standard Life and ICICIPru have these in their products portfolio.
• Convertible Term Insurance: The plan works like a plain vanilla term insurance policy but the customer has a choice to convert it into a Whole Life Plan or an Endowment Plan at specified periods. LIC and Max New York Life offer these variants.
• Term insurance with a built in Critical Illness Rider: ING Vysya's policy offers this variation.
• Loan cover Term insurance: HDFC Standard Life and SBI Life offer this product. Loan Cover Term Assurance Plan provides a lumpsum on death of the life assured who has availed of a loan especially housing loan during the term of the plan. The lumpsum or the sum assured decreases as the loan decreases.
Term Insurance is one of the most sensible products to boast of in your personal portfolio. Buy Term with Return of Premium if the option of getting your outgo back on maturity makes it more palatable.
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