Understand Your Term Plan in 5 Easy Steps

2021-07-02

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Nowadays term insurance plans are no longer simply pay for life cover plans. They have features which can make your and your dependents’ lives more manageable. Do you have a term cover? Have you explored all the benefits and options you can avail in that plan?

If not, here’s a step by step process for you to understand and find the valuable options you can use. Most important of all is whether there is anything that can make your family’s lives more comfortable in case anything happens to you.

Step 1: Risks - What Does it Cover?

It’s no rocket science that you bought the term life cover to ensure the financial stability of your family in the event of your early demise. However, that’s not all that can put your family on backfoot financially.

Here are four different risks modern term insurance plans may provide financial assistance to your family:

Risk of Early Death: The primary benefit of any life insurance plan including term insurance.
Disabilities: The best term insurance plans will provide two kinds of benefits for disabilities

1. A lump-sum payment in case of permanent total disability

2. Premium waiver to allow you to continue your life cover without having to pay any premiums in case of a high level of permanent physical disability

You can opt for anyone or both the benefits with your usual term life cover.
Critical Diseases: Critical diseases are those illnesses which may spread rapidly, are deadly and may not have a definitive cure for them. For example, cancer, heart attack, renal failure, etc. Few term insurance plans like iSelect Smart360 Term Plan from Canara HSBC Life, offer an inbuilt terminal illness cover with the life cover. However, if your term insurance plan doesn’t, you should have the option to add this cover as an added benefit.
Other Benefits: Other benefits can include payment of additional sum assured in case of death due to accident.

Canara HSBC Life’s term plan iSelect Smart360 Term Plan also offers an additional sum for the child’s goals. You can add a separate amount under the Child Support Benefit to provide for your child’s higher education and marriage goals.

If you find some of these additional benefits useful and have not opted for current term insurance cover, you should try to get them as early as possible.

Your preference should be to add these benefits to your existing policy. However, if you cannot, secure another term policy with these added benefits especially the benefits like critical illness and disability cover.

Step 2: Sum Assured - Can You Increase Your Cover?

Your income, wealth, financial status and family grow with time, and so should your term life cover. Consider for example this case:

Sandeep bought a term life cover of Rs. 1 crore at the age of 30. His annual take-home income was Rs. 12 lakhs at this time and he had just become a father to a child. Considering the goals of a single child and his family’s need for Rs. 30,000 per month as regular income, Rs. 1 crore term cover was good enough.

At the age of 35, he has another 1-year old child and his annual income has grown to Rs. 18 lakhs after tax and deductions. He has also bought a house worth Rs. 40 lakhs using 70% funding with a home loan. His family’s regular income needs (household and necessary lifestyle expenses) has grown to Rs. 50,000.

Should Rs. 1 crore term insurance suffice?

Not really, he needs to increase his term life cover to ensure that his loved ones can maintain their new lifestyle and financial goals even after him.

The best term life insurance plans will give you two options, one of which is automatically available if nothing is selected:

1. Life Stage Increments

Life stages refer to important life events which increase your financial responsibility or significantly improve your lifestyle. For example, in the case of Sandeep, he had a child, his income grew about 50% and he took a home loan.

All of these events are important life-stage events which should alert you to increase your life cover.

This benefit should be automatically available to you if your term policy has this feature. For example, under iSelect Smart360 Term Plan, you can claim the increment benefit within a year of the event taking place.

2. Automatic Increment Option

Automatic increment option is an increasing life cover, which grows at a fixed rate each year. The only catch is that you need to select this option while buying the term cover.

If you already have a term insurance plan but do not have these features in it, you may need to buy a new term cover. However, this time, be smart and buy an increasing term cover, or at least the one which gives you the option to increase the cover later.

Step 3: Will Your Plan Also Cover Your Homemaker Spouse?

You may have worried a few times about anything happening to your full-time home-manager and the effect on your household. Usual term life policies would not cover a non-earning member regardless of his or her contribution to the family.

However, when you get a term cover from an insurer, the same insurer may allow you to cover your homemaker spouse under the same plan as well.

The cover would be smaller, yet it is important, especially when the term plan is something like iSelect Smart360 Term Plan where life and critical health both are covered. With iSelect Smart360 Term Plan, you can add your spouse to your plan within one year of your marriage, if you bought the policy as a bachelor.

Step 4: Claim Settlement - Mode of Benefit Payout

Claim settlement is the ultimate point of experience in a term plan for your family. If you have selected the correct mode of benefit payments, it will save your family from a lot of headaches.

The best term insurance plans available now, including iSelect Smart360 Term Plan offer the following two modes of benefit payment for death claims:

1. Lump-Sum Only

The traditional mode, however, only advised if your family is either financially savvy or has a source of regular income.

2. Lump-Sum with Regular Income

You can choose to receive both lump sum and regular income or only regular income.

Regular income option is an important factor here as you can eliminate a ton of stress from your surviving family members after the claim.

You understand that running a household requires a regular income. This income is what defines the lifestyle of the family. If your term plan only gives the family a huge sum of money, they will need to invest it and create a source of income.

This is easier said than done. Thus, a better option is to let the benefit payout itself happen in a regular mode. With iSelect Smart360 Term Plan, you can choose a growing income option for your family.

For example, in case of Sandeep, he could divide his sum assured of Rs 1 crore into a lump sum and regular income mode in a ratio of 50:50. This will ensure

A lump sum of Rs. 50 lakhs which she can invest to meet the child’s future goals and pay off any liabilities
A regular income of about Rs. 35,000 (slightly more than current expenses) which will also grow each year by Rs. 3500 (10% simple interest) to account for inflation

Step 5: Premium Payment Term & Mode

Premium payment term or PPT is an important factor to consider with your term insurance plan. Most term insurance plans will offer three or four modes of premium payments for the policy (given below). Each PPT has its trade-offs you should consider, and some options would put you in a better situation than others.

Have a look:

1. Single-Premium Option

Most addon features which help you modify your term cover size may not be available. However, your overall premium payment is lower than in other modes.

2. Limited Pay

You can choose any PPT which is lower than the policy term. Many of the cover size amendment options will not be available, but again you get a discounted premium rate.

3. Pay till Retirement

The option allows you to pay all your premiums only till the age of 60. This is a great choice if you need to extend your life cover beyond retirement, and which you should.

4. Regular Pay Option

All the benefits and added features will be available. However, not advised if you want to continue your life cover beyond retirement or opting for whole life cover.

Check your current insurance plan and see how many of these benefits are available to you, and which ones you can add. If not, there’s always room for another policy with added benefits.

However, you should not discard your existing policy, only add to it.