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Thursday, October 6, 2016

How to save your Term Insurance premium

 While buying a term plan, many will concentrate only on the comparison of Term Insurance Premium of different companies. However, there are other methods by which one can save their term insurance premium. Let us see them in detail.

#1: Using Life Insurance Ladder

How you arrive at the sum assured requirement for your life insurance? In simple terms, these are based on below assumptions.

  • You need money to cover your family expenses until your spouse dies or your kids get a job-To arrive at this value, you must know the current household expenses, number of years you need this income stream (up to the death of your spouse or job of kid), inflation of such expenses and suppose you die today then how much return you can expect from the corpus of term insurance maturity claim.
  • Based on your financial goals-Insurance requirement for such goals be arrived at by considering the current cost of your financial goals.
  • Based on your existing outstanding loans-You are clearing the interest part by paying the EMIs. Hence, you must consider the outstanding principal to arrive at insurance requirement.

Let us take an example. First, we calculate the total amount of requirement for meeting your family expenses. Suppose your monthly expense is Rs.25, 000, inflation of such expenses is around 9% and you are sure that these expenses will be for the next 30 years. In addition, we have to consider the return on investment (when we invest the death claim amount of term insurance) to meet these expenses for next 30 years. I mean to say that how much amount you need today so that we invest that amount in any product and start to withdraw money monthly from this. Hence, we have to assume the return on investment of such corpus. Let us assume this around 9%. The total corpus required for meeting these expenses will be Rs.90, 00,000. This amount is your insurance requirement to cover the household expenses for the next 30 years (in case you die today).

In the same way, we have to calculate for the each financial goal. For example, kid's education. You need Rs.15, 00,000 (in current terms) for education after 10 years from now. Let us assume the education inflation at 10% and return on investment to generate this much amount will be 9%. Then the current amount required to meet this goal will be around Rs.17, 00,000.

Finally, you also include the outstanding loan principal to your life insurance requirement. This is required, because if you die today, then your family member will pay and clear off the loan from the claim amount of Term Insurance. This let us say as Rs.50, 00,000 (current outstanding amount).

Many people add up all these figures and arrive at the sum insured requirement. In addition, they try to choose the term up to the age of their retirement or the maximum term offered by insurance companies. However, you all know that term insurance premium depends on the term you chose. The premium will be higher if your term insurance term is longer and shorter if the period is shorter.

Instead of sticking to one term plan and choosing a single term, if we split based on our requirement like one for expenses, others based on the tenure of financial goals and one for outstanding debt, then definitely this saves premium.

From above three examples, if we split our term insurance buying like Rs.90, 00,000 to meet the household expenses (up to your retirement age), Rs.17, 00,000 to meet the financial goal of kid's education and a term of 10 years, and finally Rs.50, 000 term insurance matching the term equal to loan tenure. Instead of having a term insurance of Rs. 1, 57, 00,000 (Rs.90, 00,000+Rs.17,00,000+Rs.50,00,000), if we split based on our requirement like above then it will drastically reduce your premium. We buy Rs.90, 00,000 sum assured term insurance with tenure of 30 years (Hoping you are 30 years of age and planning to retire at the age of 60 years), Rs.17, 00,000 sum assured term insurance with tenure of 10 years (to meet kid's educational) and Rs.50, 00,000 term insurance for tenure of  15 years (hoping loan tenure is 15 years from now).

This step of laddering your life insurance will definitely reduce the premium you pay towards term insurance.

Advantages of using the Life Insurance Ladder method-

  • Indirectly you are planning for your major financial goals. Hence, it creates a systematic financial approach.
  • You receive a fresh cash flow as and when the individual policies close.
  • It may lower your premium.

Disadvantages of using the Life Insurance Ladder method-

  • It may complicate nominee to handle all policies. Hence, better to have insurance with one company rather than choosing different companies.
  • It creates a major financial burden, in case you not planned for other goals. From above example, if one not planned for retirement and dies at the age of 55 years, then his nominee will receive the claim amount of Rs.90, 00,000 only (because two policies matured due to maturity of tenure of kid's education and loan repayment). However, if one opted a single policy until his retirement age, then his nominee will receive a higher sum assured (In above case Rs.1, 57, 00,000).
  • Tracking of term insurance will leads to complication. Because managing a single policy is easier than managing 5-10 policies.
  • Finally, if your insurance company giving you higher sum assured rebate or loads for a lower sum assured options then this may not actually save premium.
  • Postponing of goal may harm the goal funding. For example, you assumed that kid's marriage will be after 20 years from today and buy a term insurance matching 20-year term. However, if kid's marriage postponed to 24th year and your death occurs after 22 years from now then your nominees may feel hard to fund the marriage expenses. Hence, you must be particular about goal period.

#2: Buying at early age

We all know that buying a term plan when young is cheap. Because term insurance premium depends on age. Younger the age means lower the premium. Hence, try to buy the term insurance immediately once you start to earn.

#3: Restricting your term of term insurance

People have a tendency to try to get benefit at any cost from term insurance. They know that risk of dying is higher when they get old. Hence, instead of restricting the tenure up to their retirement age, they go beyond that. They look for term insurance, which covers them up to their age of 70 Yrs of 75 Yrs. However, sadly they forget the simple funda that, the value of current sum assured they looking for will not be same when they return at that age.

In addition, by increasing the tenure, you are indirectly increasing your premium payment. As I said above, longer the term insurance period leads to higher the premium. Hence, restrict your tenure to the maximum of up to your retirement age.

#4: Comparing the insurance companies

There is a huge competition among insurance companies when it comes to term insurance. Hence, all companies lure you by providing the competitive rate. Therefore, do your own research to compare the premium. However, never compromise on the features you are actually looking for. Usually, new insurance companies offer lesser premium than the older. However, at the same time, I am not suggesting you to go for new companies. Instead, buy from a company, which suits your need and your comfort with the company.

Note-Never, heed the advice of comparative portals. I know they insist you for a particular company to go. Because there is a commission if they promote or sell a particular term insurance (even if it is ONLINE).

#5: Buying a plain product-Nowadays, insurance companies offer many variants of term insurance plans. Few of them are like premium back term insurance, part of the sum assured as a lump sum along with monthly income over a period or 100% of Sum Assured on death and a monthly income depending upon the option chosen: Level income or increasing monthly option. Understand your need, cost involved in such fancy offers then only try to buy.

Along with such fancy offers, insurance companies offer riders like accidental or critical illness. Nothing is free, that applies to here too. All these features will actually come up with a cost. Hence, don't buy those products which combine riders. Instead, I always suggest buying accidental or critical insurance policies from General Insurance companies. If buying them separately, then you will get many more features than these riders will.

Hope above 5 points will definitely help you to save the term insurance premium.

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