Bhumil Haria

Purchasing Term Insurance in India

Published May 9, 2021

In the past few months I’ve been on a journey to get my personal finances in order. Next up on my list after health insurance was purchasing a good term (life) insurance cover for myself. This post documents the step for anyone else who might want to do it in the near future. If you have read through my previous post on health insurance, here’s the good news: term insurance is a MUCH simpler product, so this post will be correspondingly short. The only real hard part is to figure out a correct Sum Assured that works for you… but I’m getting ahead of myself.

One thing I want to mention upfront: I’m not too much into euphemisms, so I prefer thinking/writing “die” instead of roundabout phrases like “in your absense / when you’re gone / pass away / etc”. If that offends you… well, sorry about that. But words do not change facts, so I urge you to still read on.

This post does not recommmend what to buy, only explains concepts and talks about how to go about making a decision

Basics

What is Term (or Life) Insurance?

Term insurance is simple: it protects your family financially in case of your (untimely) demise. Some people look at term insurance as a way to substitute for their income after they are gone. Some people look at it as a bonanza for their family members. Everyone has their own perspective, and while many different perspectives might be valid, I am here to share mine (explained further).

One more note before we dig deeper: While “Term Insurance” and “Life Insurance” are the same, we will not be using “life insurance” to avoid any confusion with LIC (“Life Insurance Corporation”) policies, which are sold in the name of “life insurance” but are actually endowment plans, not term plans.

Why should people consider Term Insurance?

In my opinion, you should look at Term Insurance from one and only one lens: If I die WHILE I HAVE DEPENDENTS, something needs to substitute for my monthly income so my family/dependents can maintain a similar standard of living.

There’s a very simple reason for my rigidity of perspective here - It automatically takes away some of the questions that could lead to you take undesirable financial decisions. Here are some examples:

  • If you think of it as a “lottery” for your family, then the next logical question you’re likely to consider is whether the cost (premium you pay) is worth the lottery (Sum Assured). At this point, you’re considering this like an “investment”, which it isn’t. As soon as you think this way, you’re going to compare “but if I invested the premium amount in FD/Mutual Fund/etc, I would have a far better corpus at the end of term”. This is a very silly comparison because it assumes you’re going to live till end of term. If that was a known certainty, then you wouldn’t need insurance in the first place. The point of term insurance is that if you were to die tomorrow, you would get the whole amount. Go calculate the ROI on that.

  • Similarly, as soon as you’re in the “what do I get in return” mindset, you’re also going to think “But if I don’t die within policy term, all that money (premium) is wasted”. Which will make you consider plans that return your premium at the end (and which agents LOVE to sell), which are an absolute no-no.

The way I want you to consider term insurance is this: Think of it like an annual Netflix subscription. You want to be able to watch movies/shows, and you pay Netflix a fixed amount every year for the ability to do so. With one small addition: if you commit to purchase the subscription for a long term (say 30 years), you get it forever at today’s discounted rate. If you stop paying in between and then want to resume, it (naturally) becomes more expensive.

The same (super simple) logic applies to term insurance as well - only that the product isn’t a movie streaming service, it is “covering the risk of your untimely death in THIS year”. Note the emphasis on this year. Of course you need to commit for a long term, but every year you pay the premium you get protected. If you stop and then resume, your premium increases significantly.

Effectively, I’m suggesting you look at term insurance as a (necessary) Expense, not an Investment.

(Obviously, I hope it goes without saying that the difference between Neflix and Insurance is that the latter is important/essential for the financial well-being of your family.)

Do I need Insurance?

If you have people who are FINANCIALLY dependendent on your ACTIVE income, you should get term insurance. Otherwise you don’t need it. Very simple.

Usually (for most people) dependents include parents, spouse (if not working), and kids.

  • If you have enough saved wealth to help your dependents through their lives (or until they become independent), then you don’t need term insurance
  • If your parents are dependent on your income, you need to cover them. If however, they are wealthy and can live their lives without you in the picture, you don’t need it for them.
  • If your spouse doesn’t earn and is dependent on your active income, you need to cover them
  • If you have kids, you need to cover them

One note worth adding: If the spouse is working and you have (or plan) kids, then while they technically are not dependents, but giving them a financial buffer as they work and run a single-parent family can’t hurt. (One can only hope they remarry, but who can predict what will happen?)

My employer already provides term insurance!

Are you sure that you’ll be in this company forever? Are you sure that any other company you join will have similar cover? Are you sure that you’ll be employed if you meet your untimely end?

The questions are rhetorical, I hope I conveyed my point.

Terms

  • Basics

    • Term (Policy Term): Number of years for which the policy contract is in force.
    • Sum Assured (SA): The total amount to pe paid to your dependents if you die within the Policy Term.
    • Payment Mode: In case of death, you can choose to pay your family a single lumpsum amount or a monthly “income”. Unless you have a strong reason to choose monthly, always go with lumpsum.
    • Payment Term: The number of years for which you will pay premium is called Payment Term. By default, it is same same as the Policy Term, and that is called a Regular payment term. Some policies allow you to make premium payments for fewer number of years than the Policy Term (eg. 5/10/15 years) - they are called “Limited Pay” plans.

  • Options and Riders

    • Level Sum Assured: By default, policies pay a constant SA which does not change over the Policy Term. This is also called Level SA.
    • Increasing SA: Some plans offer the option of automatically INCREASING your SA over time to cover fot your rising coverage needs. These might be a good option depending on your needs.
    • Decreasing SA: Reverse of the above, some plans allow you to DECREASE your SA over time. The (very good) logic here is that as you grow older, your responsibilities/liabilities reduce, so you can save some money by not having unnecessary coverage in years you don’t need it.
    • Accidental Death: This rider provides an additional Sum Assured if you die due to an accident (in additional to your original SA). I’m guessing it might be relevant for some people/situations, but the way I look at it: If your aim is to protect your family in case of your untimely death, does it matter if you died from an accident or otherwise? Your policy SA should be based on their needs, not your cause of death (IMO).
    • Return of Premium: Some plans return your premium at the end of the Policy Term if you survive it. Please do us both a favor and NEVER buy these. Remember… would you expect Netflix to return your money after 30 years?
    • Waiver of Premium: This is a rider where if you are permanently disabled (or some other similar event as defined in the policy), all your future premiums are waived off.
    • Critical Illness Rider: I haven’t been able to make up my mind about this one, so I’ll skip this from the post (I haven’t gone for this rider in my own policy)

Do’s and Don’ts

In case you decide to stop reading this post, I still want you to get some takeaways before we get to the part about how to get insurance

Do’s:

  • Do evaluate whether you need to buy term insurance, and if yes, do it quickly
  • If you are hit with analysis paralysis, remember that a bad policy might still be better than no policy
  • Remember that compounding inflation means that your expenses in 20 years will look very different from your expenses today.

Don’ts:

  • Don’t buy any product which mixes insurance and investments.
  • Don’t buy LIC Endowment Plans (regardless of whether it’s your own cousin/uncle/family-friend/neighbour who is selling it).
    • To give you a ballpark example, a 1 Crore Term plan costs around 8-10K (annual premium). A 1 Crore Endowment plan will cost you many Lacs (annual premium).
    • Sure it will give you your premium back, but a PPF investment will likely do better.
  • Don’t buy any term plan which “returns your premium”.
  • Don’t buy term insurance if you don’t need it

Steps to buy Term Insurance

Anyway, now to the actual steps. Here’s what I did:

  • I went to Beshak to compare insurers (not plans) and made a mental model of what factors need to be considered. This is cakewalk compared to health insurance. I have already written down most definitions above, so you might find this step easier.

  • Filtered for large insurers. Then preferred the ones with better product and claims experience (I personally didn’t care that much about their customer service rating, but your priorities may differ). Made a list of Insurers I didn’t mind going with (Max Life, ICICI Pru, Aditya Birla, Bajaj Allianz) - frankly I think this was just based on how large and well-known they are, no science involved here.

  • Went to Policybazaar (apparently now they have an option to not spam-call you for term insurance). Selected the appropriate values for the following:

    • Filtered for the above insurers
    • Set (Level) Sum Assured and Policy Term (see next section for how to calculate)
    • Lumpsum payment on death (no monthly nonsense)
    • Premium Frequency (Yearly)
    • Premium Term (Regular, no early payment)
    • I didn’t select any optional riders/add-ons (you can change this as per your need)

  • Since after a point all large brands are the same (esp since Term Insurance is a very simple product), I chose the cheapest.

  • In case of death, it would be much more nice if there was someone to assist my dependents with the claims process, so I did prefer to go with an agent if possible. I sent the details of what I was considering to someone I know, and since the difference in premium was negligible, I went with an offline purchase.

Deciding Policy Term and Sum Assurred

This is the hardest part of getting a term plan. Hopefully I can simplify this a bit.

Term:

  • You want to cover yourself till the time you expect to keep actively working and earning income.
  • If you are not sure, a reasonably safe default would be to cover yourself to the age of 60-65 years. But remember, the higher the age at end of policy term, the more the annual premium.
  • Example: My default intention was to buy a policy till 55 years of age. If I’ve survived by then, then the hope is that I likely would have built up enough corpus to sustain dependents even if I died at 55years + 1 day. However, I can’t predict the future, so I’ve purchased the policy for 60 years. If I don’t need it after 55, I’ll simply stop paying the premium.
  • There are some policies that cover you till 85 or even 99 years. If you are tempted to buy those so that your family gets the lottery:
    • Remember what we discussed earlier. Treat term insurance as an expense, and hope you never get that money back. If you’re thinking of keeping a term of 90 years, you’re again drifting into an investment mindset. Besides, will you be actively earning till age of 99 ?
    • If you, with 10 minutes of knowledge, can figure out that you can get the SA if you extend the Policy Term, so can the Insurance actuaries who are literally paid for this. If you increase the age, rest assured that the premiums will more than commpensate for the “certainty” of income.

Sum Assured:

  • You will find many different ways of calculating this. Mentioning some methods below, from simplest (and less accurate) to more complex (and more accurate):

    • 10-20x your annual income
    • 250-300x your monthly expenses
    • Expenses + Major Expenses + Major Liabilities (as mentioned in the Beshak guide)

  • Instead of explaining them here, I’m making a spreadsheet that should help you calculate SA using ALL the methods above and compare the results. Here is the Google Sheets Link . You will have to copy the sheet to be able to make changes to it. (BTW if you find this sheet helpful, do let me know :) ).

  • If you get confused and are not sure what approach to take, go with Method 3.

  • A few more pointers to keep in mind:

    • If you are getting a home loan, I would suggest you to get a Single Pay insurance for the person under whose name the home loan is taken. (Most likely your banker will try to sell you this anyway.) This is NOT essential, and may even be economically slightly worse, but for the coverage + peace of mind it provides, I’d just consider my home to be that much more expensive.
    • This will also help simplify your other Term SA calculations because you can put in Zero in your Major Liabilities section.
    • One thing that I haven’t mentioned above (that Sengupta pointed out) is that you should also consider who the coverage is for, and till when would they need it. When planning coverage for parents, you’ll have to assume a date beyond which they will no longer need the coverage. For kids, they will grow up and become independent some day. If you expect these to be very different timelines, factor those into your SA calculations.

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