Term Insurance Buying Guide For 2021

Most people buy insurance policies as a last-minute tax-saving option or an investment for returns. This approach is totally wrong. A life insurance plan must be bought for the very purpose of insuring your life.However, within this space, the alternatives are many. This article therefore uses several filters to find out which term insurance policies offer maximum advantages​

When it comes to buying life insurance, term insurance proves to be one of the best options in terms of pure risk protection. This is because it offers you higher risk protection at a very reasonable price. Though these days we see a lot of variations in term insurance, it is still prudent to opt for the plain vanilla term insurance plan where on the death of the insured, the nominee receives the lump sum amount and on survival there is no benefit whatsoever. As in the mutual fund advertising campaign, the perennial question that plagues the minds of investors is regarding the best mutual fund scheme that can be chosen from the large bouquet.

\In the case of the insurance campaign, the reply is that life insurance should be a priority. But then the question that pops up is about which life insurance is the best? The answer to this would surely be a pure term plan. However, it is also important to understand which term plan offers maximum benefits. This article will help you sift through a choice of top term insurance plans that you can consider buying and will also provide you with key points to understand before buying a term plan.

Here, you may be tempted to think about why you should opt for a life insurance policy that does not provide anything apart from death benefit. The rationale behind the same is that first you should protect your life adequately and then think of investment. And the other policies are not that cost-effective to provide you with the best of both the worlds i.e. investment and life cover. Hence, opting for a term plan makes more sense. In order to arrive at the final verdict, we have screened them based on the following parameters:
✓Age of the insurance companyn
✓Five-year average claim settlement ration
✓Five-year average claim settlement amountn
✓Premium cost.

Finally, to arrive at a final score, we have given equal weightage to all the above parameters.

Age of the Insurance Company
While buying term insurance, you need to ensure that the insurance company has been in the industry for quite a long enough time. We usually prefer insurance companies that have been in business for at least 15 years.

As can be seen from the above graph, from a total 24 life insurance companies, 15 of them have had a presence in the industry for the last 15 years. Therefore, we would be considering those 15 companies for further analysis. A point to note is that life insurance being a long-term contract it makes more sense to look for well-established companies. That said, it in no way means that companies in operation for less than 15 years are not trustworthy.

Claim Settlement Ratio
Claim settlement ratio is one of the important parameters to look while buying life insurance. In fact, Insurance Regulatory and Development Authority of India (IRDAI) posts it every financial year in its annual report. However, relying only on the recent claim settlement ratio many a times does keep you tilted towards recency (a time immediately before the present) bias. Hence, we usually prefer companies having a better five-year average claim settlement ratio.

The above table shows the five-year average claim settlement ratio along with FY 2019-20 claim settlement ratio. We believe the claim settlement ratio should be at least 95 per cent. Keeping that in mind, out of 24 life insurance companies only 10 of them managed to have five-year average claim settlement ratio above 95 per cent.

The claim settlement ratio should not be seen in isolation.

Five-Year Average Claim Settlement Amount
As said earlier, claim settlement ratio should not be seen in isolation. Along with the claim settlement ratio, it is also important to know the average claim settlement amount. This helps us understand which product might have contributed to the claims settled by the insurer.

The above graph shows the five-year average claim settlement amount. We believe that on an average the average claim settlement amount should be more than Rs 4 lakhs. And as we can see, LIC and Max Life, which have one of the highest claim settlement ratios, have five-year average claim settlement amount below Rs 4 lakhs. This likely suggests that the claims that they settled were mostly for traditional products. In this space, Aegon, Aviva and Edelweiss Tokio outshined other insurers.

Premium Cost
Just choosing the best product while ignoring the cost might lead you to pay much higher than what the product deserves. Hence, even in life insurance you need to look at the cost that you pay in the form of premium. However, in no way does a lower or higher premium mean a better product. Therefore, don’t just chase premiums; rather take a holistic view. In order to arrive at the premiums, we have assumed a 30-year-old non-smoker male with sum assured of Rs50 lakhs and policy term of 30 years.

Final Verdict
So, based on our analysis and running all the insurance companies through various parameters, we have come up with top five term plans that you can consider buying.