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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.
My kid plan to go canada for higher studies and than PR . I want to know which term insurance require. Which is best for international
Dear Patel,
There is nothing called international term insurance. The one which is available for all citizens can be fine.
Hi sir,
I am 33 age I have decided to take a term plan and finding PNB Metlife suitable for me.resons are covering till age of 99.less premium in comparison to other comp mainly aegon and hdfc.
Pl suggest should I go for the same.
Vinay-Do you think life insurance required till 99 years of age?
Sir is it good or not??
If not why??
Vinay-That is different story but what I am asking is something different. Do you really need LIFE INSURANCE post your retirement?
Sir,
My opinion is now Term plan premium 15000 per year after 30 year premium value is less only so i think to get policy upto 45Years is it right or not please suggest me.
Vinay-Your premium VALUE will be less after 30 years. Same way the Sum Assured you are opting will also decrease in value.
OK sir thanks….
Hi Basu,
why the sum assured will decrease in the value when it reaches end. you mentioned same kind of point in #3 “he value of current sum assured they looking for will not be same when they return at that age.”
i didn’t get this point, could you please explain.
Dear Murali,
With rising inflation, the current sum assured of Rs.1 Cr will not have the same value when you retire.
could you please elobrate on below point :
in ” Restricting your term of term insurance–” para you mentioned as below
“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.”
do you mean after 70 age my inital sum assured of 1 cr will be reduced to < 1cr as i grew older ?
please clarify …
I ment less than 1 cr as I grew older ?
Satya-The value of money depreciates as the time pass due to inflation.
in your articles u mention that do not include additional ridders in term insurnace. So what should i do to cover death due to accident as term insurnace not cover the death due to accident. Also that tell that is term insurnace companies cover death due to illness
Man-Term insurance covers death due to accident. Please check it. Accidental insurance have different features. Check and decide.
Hi Basu!
I have bought LIC e-term of Rs 80 lakh in Nov 2015 in aggregate category only after getting knowledge about term insurance through your blog and I want to thank you for that. My premium amount is Rs 17,000(including service tax). My age is 27 year and annual income of rs 5 lac.
I want to know some suggestions from you regarding this:-
1. I was smoking at the time of buying the policy but now I quit the smoking since Jan 2016 and I think I am paying high premium to my policy is it advisable to surrender the policy and buy new term policy in non smoking category at cheap rate.
2. If I buy another term insurance of LIC in non smoking category would there be any problem in near future as they ask previous policy details at the time of buying.
3. If I go for term insurance from another private companies like hdfc or Icici would it be necessary to provide details of my current policy.
What should I do to buy the term plan at lower premium rate.
Would be thankful to get your answer.
Pankaj-1) First check the premium as per current age and health. Once if you feel the new policy will be cheaper and they issue it, then go for cancelling the existing one.
2) Yes, they ask for old policy details and if you skip, then also a problem and if you show then they not allow one more policy based on your income range. Hence, I suggest to look for different insurer. Once they issue the policy, then cancel it.
3) If your intention is to cancel the existing one, then don’t provide those details.
Thanks a lot for your suggestions… Although current premium is very much affordable by me do you think i should go for other insurer. There is little hesitation to go for term insurance other than LIC at the same time paying high premium for the same sum assured amount I don’t think a smart decision. Whether hdfc, icici etc are as good as LIC??
Pankaj-All insurance companies are same to me. However, if you feel LIC is BEST then stick to it.
Thanks for your reply.
Hi Basu,
Great Post. Is there a term insurance for a couple where if either dies the other gets the SA?
Also can you suggest a good Insurance for Critical illness Cover?
Thanks
Piyush-Read my earlier post “Joint Life Term Insurance Policies-Who can buy?“. Buy separate critical illness cover from general insurance companies.
Hi basu,
Trust u r doing well….
I am 31 and my annual salary is 5.12 lakh.
I have decided to take a term plan and finding edelweiss Tokyo life my life+ suitable for me.resons are covering till age of 80.less premium in comparison to other comp mainly aegon and hdfc.
Pl suggest should I go for the same.
One more thing missed to mention that I am seeing for a term plan for 75 lakh.In edelweiss it is costing me 8433.00 exclusive of taxes.
Ashish-Please go ahead but restrict the term equal to your working age.
What about claim settlement ratio which is less in case of edelweiss.
Ashish-After the recent modification to Insurance Act, I don’t think claim settlement ratio is any relevant factor to consider for term insurance.
Basu frankly saying I am not aware of the recent modifications. Surely u must have covered the same in one of us blogs.pls mention the same so that I can refer to it.
Secondly I am working in a pvt comp & retirement age is 60 so should I go for a term plan of 29 yrs only……
Ashish-Wait for a post on the same. Yes, go ahead for 29 years term ONLY.
Hi Basavraj,
Great article! Quick question… Is it possible to cancel a rider from an LIC policy (new jeevan anand)?
Thanks in advance!
Adit-No, in between you can’t stop riders.
1. Do I need to disclose about Personal accident insurance to term insurance provider.
2. Do normal term insurances cover death due to critical illness and accident ?
Hemanth-1) Not required. 2) Yes.
Dear Basuji,
I am 35 , occasional smoker. and diagnosed with Type 2 Diabetes 3 yrs back. diabetes under control .
Can you suggest me company which loads minimum for diabetics . I need SA 1 crore for 30 yrs.
thanks
Sudhir-There is no such hard rule that company X load lesser than company Y. It purely based on individual case. Hence, go ahead with the company which you feel comfortable and have it first.
Hi
Nice article on term plan. I have a question please try to answer. Am 40 I have recently purchased in July 2015 online term plan for 50 lacs from Aviva for 30 years. They have added extra premium of 100% due to diabetic condition. I have declared the same in the proposal form as well. Does all insurance companies charge extra premium for diabetic condition, and how much?
I have accepted the proposal cos I cannot delay the insurance other wise if age increase the premium will also go up and there is no point for going with other insurers even they can charge extra 100 or 150 % or can reject it as sell who knows for same condition. Does my decision makes sense to you?
And one more question is I do have the offline term plan with the same insurer for 50 Lacs purchased during 2011 that time, as per their medical report I did not have diabetic and they issued me the policy at standard rates. Does this offline term plan gets chances for rejection due to the current diabetic condition which I have mentioned in the proposal for new online term plan which I purchased during July 2015?
Please comment in detail
Satish-Yes, they load the premium based on the risk they are going to take by issuing a term plan to you. But the amount of loading is entirely left with individual insurance company. If premium is affordable to you then it is better to accept it. If you found of non-diabetic for an earlier medical check up or during that issuing of an earlier offline policy, then it will not affect anything. They will not reject based on this reason.
Hi Basavaraj Tonagatti ,
Thanks for the nice article! The Total sum assured is maximum of 20 times of your annual income irrespective of your loans the insurer will not give any additional coverage based on your future income?
but I don’t understand when we get the Loan based on future income ,why can’t they give more insurance based on potential future income.
Another question i have is do the claims will reject in case the sum assured is more than of 20 times coverage.
as you know income might go up and down in one’s career, will that impact the claims ?
Please share your thoughts on this.
Regards,
Shravan
Shravan-I said 20 times just with presumption that for at least your family will be safe for next 15-20 years. But how much to issue the insurance depends on individual companies underwriter. Your loan eligibility is calculated based on your current income but not future income. No, once the policy is issued then it will pass through normal procedure of claim. There is no such rule that if person is having more than 20 times of coverage then it get rejected.
Very Informative Article…Thank you so much Sir 🙂
Brahmananda-Pleasure 🙂
But you cannot buy the same term policy from the same insurer, this i was given to understand by an Insurance Broker; is it true?
Sushila-There is no such restriction. You can by N numbers of policies (provided your health and income matches to insurance companies) from same insurers.