Those who have bought term insurance plans or are aware of them know that these are some of the most inexpensive insurance covers you can ever avail. Compared to any other type of life insurance plan, be it an endowment, money back, or even Unit-Linked Insurance Plans (ULIPs), term insurance plans fare far better on both cost and cover.
There are multiple factors affecting the life insurance premium. Some of the common factors applicable to all the insurance plans are:
- Age of the proposed insured
- Physical attributes and health of the insured
- Sum assured opted
The age and health attributes are common denominators for all life insurance plans. That is, the higher the age of proposed insured the higher the premium will be. Similarly, the better the health of the proposed insured, the lower the premiums will be. The sum assured can also be counted in the same category as age, the higher the sum assured, the higher the premium.
But if you compare the premiums for the same sum assured under endowment, money back and term plans you can find there is a significant difference between premiums.
Why are Premiums different across different life insurance products?
Life insurance premiums consist of the following three components:
- Mortality Premium: This is the money charged for pure term cover, i.e. the death benefit charge
- Investment Component: This is the amount of premium that insurer will invest to ensure predefined money returns to the investor.
- Expenses:Various maintenance and management related expenses are added to the total of A and B above to arrive at the final premium.
Now, mortality premium or premium chargeable for the life cover remains the same, whether you buy an endowment plan, ULIP or term insurance. This premium is only affected by the common factors of age, health, and the chosen sum assured amount.
Whereas, the investment component forms the major part of total premium payable by the investor. Let us look at the following example, where a 30 years old individual wants to buy a Rs. 25 lakhs life insurance cover.
Premium Payable for Term Life Insurance of Rs. 25 Lakh will be Rs. 5000 per annum for a 30-year pure life cover (This premium includes expenses applicable to the insurance plans offered by the same insurer). It means that:
- If the insured dies within next 30 years, his nominee will receive Rs. 25 lakhs
- If he/she survives next 30 years, nothing will be paid to the nominee or the policy-holder
This premium includes expenses applicable to the insurance plans offered by the same insurer.
Now, if the insurance plan is a money back plan, it must return Rs. 25,00,000 to the investorat the end of 30 years. Since the plan guarantees this, the money must be invested in safe instruments earning 6 to 8% per annum.
At this rate, you will need to invest approximately Rs. 30,000 to Rs. 20,000 additional each year for next 30 years.
Thus, your total premium payable will be:
- 5000 p.a. for a 30-year pure life insurance plan of Rs. 25 lakhs
- 38,000 p.a. (30000 + exp. at 10% + 5000) for a 30-year Endowment or Money-back plan
You get a life cover of Rs. 25 lakhs under both the plans but, you end up paying just Rs. 5000 p.a. for a pure life insurance cover.
Other Cost Savings under Term Insurance Plan
The insurance premiums are usually tax-deductible in the year they are paid, and any maturity value received is also tax exempt. The condition to avail both deductions is that your premium paid should not be more than 10% of the sum assured of the policy.
For example, for a life insurance cover of Rs. 25 lakhs, the premium should be less than Rs. 2.5 lakh.
This condition does not affect the taxability of investors paying anannual premium towards endowment or money back plans. But in the case of single premium plans, the premium can easily surpass the 10% limit. This will not only negate the current deduction you could have availed but also makes the maturity value taxable.
Though, single premium term plan will still be eligible for 80C deduction as the premium will be less than 10% of the Sum Assured.
How to Buy Term Insurance Plan?
Term insurance is a pure life cover, it is a contingency plan, and you’d like to save as much money on it as you can. Therefore, the best way to avail term insurance plans is online. You can also opt for many additional benefits online, in the same amount of premium you will pay for only pure life cover bought offline.
Insurers like ICICI Prudential Life, offer accidental, critical illness and disability benefits as added benefits with their online term insurance plan.
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