Checklist for Term Insurance

Before reading this, we would strongly recommend you to go through the below

1. What is a Term Plan?
2. Top Term Plans in India for 2025

First of all, happy that you are planning to secure your Family. Once you select the Term Plan you want to buy, there are multiple factors like cover amount, payment term, payment frequency, Add ons, payment mode etc. 

We have simplified it for you and built a comprehensive, unbiased guide on these key factors while you purchase a Term Plan. 

Key Factors to consider while purchasing a Term Plan.

1.Cover till : 

You need a life cover till your dependents become independent, which should ideally happen before your retirement. Key assumptions here : 

• Your children are supposed to have become independent before your retirement and 
• You are expected to take care of your dependent spouse & parents from your retirement fund. you should build your retirement corpus as per your needs.

So the ideal cover age is till 60 years (Retirement age), beyond that it is not suggested and also the Insurance premiums will increase exponentially if you take a cover post 60 years. Just in case your kids are born a little late (say when you are around 35) and they will take some more time to settle. Then you might consider taking your cover age till 60.

2.Cover Amount: 

Please check Term Insurance cover Calculator

How much cover amount should you take? A simple calculation would be to consider 20 times of your Annual Income. Or 

Ideally a Term Plan cover amount should cover your Family/Dependents basic expenses and cover your Outstanding Loans. In case of an unfortunate scenario, your dependents will have basic expenses and also will not have an outstanding loan amount burden.

To calculate your cover amount, calculate your current family's basic annual expenses, multiply with years of coverage & add the current outstanding loan amount . This ensures your family maintains their lifestyle in your absence. 

*If you have taken any insurance for Outstanding Loan, you need not add it in the cover or you may cancel that loan, get a refund and consider it here in Term Plan.

*If you are expecting kids, please ensure to add your kids expenses as well. Just for a reference : A family of 4 living in a 2 BHK in a city like Bangalore would experience Rs. 1 Lakh for basic expenses (on an average).

*Current Liquid Assets & Buffer amount is optional.

Let's understand with an example : Let's say you are 25 years old and want to take a Term plan till 60 years. your Basic Monthly Expenses are Rs. 50,000 per month and Outstanding Loan amount is Rs. 50 Lakhs (without an insurance) and you want some 10% buffer. So, 

Cover Amount = ((60 age - 25 age) years * 12 months * (Rs. 50,000 per Month basic expenses) + Rs. 50 Lakhs Outstanding Loan ) * (1 + 0.1 buffer)

Cover Amount = Rs. 2.86 Cr (need not consider inflation in it, Since the calculation is done assuming the worst case scenario and when an unfortunate scenario happens your dependents are expected to keep the lumpsum money in an FD and withdraw as per the need, which would take care of the inflation)

3. Payment Term : 

You should consider Regular Pay i.e. Pay the premium amount till your cover age (till 60 or whatever it is) or worst case till 60, since you are not expected to have an income after your retirement. Why? You will pay a high premium if you consider Limited Pay (eg : pay for 10 years). On the face of it looks like you are paying less, but you would be better off if you invest the difference amount (limited pay premium - regular pay premium) in a fixed return security. 

Please read more in Limited Pay vs Regular Pay.

4. Payment Frequency:  

You can pay monthly, quarterly, half yearly or annually. It is completely upto you. If you consider the time value of the money, it is better to pay monthly. If you don't want monthly and want to plan your finances yearly or half yearly, you can choose and it is completely upto you. It is also called Mode of Premium Payment (not sure why, it is confusing with payment mode)

5.Add Ons:

Suggested Riders from Honvest: Critical Illness Rider, Waiver of Premium Rider, Terminal Illness Rider, Life Stage Benefit /Voluntary Benefit (Instead of this rider, you can always purchase a better term plan later, but this rider can save you time and hassle during your life’s milestones). 

Please read more about Term Insurance Riders.

5. Zero Cost Term Plan (Premium back Term Plans):  Not suggested.

These term plans pay back your premiums almost at the end of the policy term. It is to give you an impression that it doesn't cost you anything. But there is a something you should know.

1. You get all your premiums back at the end or at some point near the end of the policy term, Let's say after 30 years, If you consider the time value of the money it is not worth it at all compared to the higher premium you would pay for a Zero cost term plan.

So you are better off taking a normal term plan and investing the additional money in any fixed return asset classes (FD, Gold, Bonds etc). you will get more money than the return of your premium. It is true for most of the cases, but do your calculation before considering a zero cost term Insurance plan. 

Please read more at Zero cost Term Plan blog.

6. Don't fall for Discounts : 

you must have come across : 

• 12% Discount for Salaried
• 5% Discount included
• 4% Online Discount etc.....

We are not saying don't take discounts, you should avail them. But

These discounts are offered online or offline (not permitted offline though) are for mostly on first year premium only. Please DONT compare the discounted premiums and make your purchase decision or change your purchase decision of a Term Plan. From 2nd year onwards your Term plan will become costly.

Suggestion : Please compare the SECOND year Premium for a better understanding.

7. Nomination:

After all, the most important aspect of Life Insurance is Nomination. After all, we take Life Insurance for our dependents. please ensure to mention at least 2 Nominees & their percentage share on the claim amount. 

If you have minor dependents, please ensure to mention their guardian (apart from you). Like in the case of children, their mother can be the guardian.

Summary:

The most important aspects of Term Insurance to check before purchase are Life cover Amount, Cover Till, Payment Term, Nomination. Please ensure to make the right choice and don't get biased opinions on these.

Regards,

Honvest Team.