Rahul Shah, 30, an IT professional, has three dependents - his parents and his wife. Shah's annual salary of 8 lakh is good enough to support his family, but he is worried. Since he is the sole breadwinner, his dependents could be under tremendous financial stress in the event of his untimely death. Therefore, to mitigate the risk, Shah is considering buying a life insurance policy. However, given that there are over 20 life insurance companies offering a variety of products, Shah is trying to zero in on a policy that would suit his requirements best. Life insurance can be broadly classified into five types: Whole Life Plans, Term Plans, Endowment Plans, Money-Back Plans and Unit-Linked Insurance Plans (Ulip).
All products come with tax benefits of up to Rs.1.5 lakh, under Section 80C of the Income Tax Act, 1961, on the premium paid. Keeping in mind, Shah's family and monetary background, financial planner Hemant Rastogi of Wise-invest Advisors are of the view that a term plan would be his best bet. The reason is that such plans provide the most cost-effective risk management cover at very low premiums.
WHAT'S A TERM INSURANCE
Term Insurance is a life insurance policy where the insured pays a premium at regular intervals(quarterly/bi-annually/annually) and the insurer agrees to pay the beneficiary or the nominee the sum assured in the event of the insured's premature death during the policy term.
But, if one survives the policy term, term insurance would not provide any survival or maturity benefit ts. Of late, however, insurance companies have also come up with term plans that pay back a certain per cent of the total premium paid, if the policyholder survives the tenure. But then why should Shah choose a term insurance policy over other products.
1 PROVIDES FINANCIAL SECURITY
Pure Term Plans are not an investment option, but a means to financially secure the lives of your loved ones and help them meet their lifestyle needs in the unfortunate event of the death of the insured. As the years roll by, however, the insurance cover must be revised from time to time to meet the changing needs.
The right amount
Unfortunately, there are no easy answers because the right amount is always a moving target. Depending on where you are in your life stage, the target may keep changing and, at some point in time, you may be in a position where you would not need life insurance at all.
However, the thumb rule, according to most financial planners, is that considering rising inflation, the appropriate cover should be 10 times your annual income. Remember that an inadequate cover defeats the very purpose of buying insurance in the first place. At the same time, you must not be over-insured.
Policy term
Considering 60 years as the retirement age, the policy should ideally run for the entire duration till the time you retire. For example, Shah should buy a term plan for 30 years (i.e. 60 - 30 (his present age)), to ensure his family will have the much-needed financial cushion to fulfil their financial needs and obligations in the years ahead, in his absence.
2 IT BRINGS PEACE OF MIND
The feeling of having covered your life with term insurance can be quite gratifying. You will feel a lot relieved for sure. Your home loans, other liabilities are all under severe threat once the main source of income is gone. Term insurance will take care of all of it. So buy your term insurance NOW.
2 LOW PREMIUM
The premium for a term plan is relatively lower than all other insurance plans because there is no investment element in the amount insured.
According to an online insurance aggregator, a 30-year-old can buy an Rs1 crore cover with a policy tenure of 30 years for an annual premium of around Rs8,500 - the cheapest available option to claim a large cover. In fact, by paying just 1 per cent of his annual salary, Shah will be getting a life cover of Rs1 crore.
The premium for a term plan is relatively lower than all other insurance plans because there is no investment element in the amount insured.
According to an online insurance aggregator, a 30-year-old can buy an Rs1 crore cover with a policy tenure of 30 years for an annual premium of around Rs8,500 - the cheapest available option to claim a large cover. In fact, by paying just 1 per cent of his annual salary, Shah will be getting a life cover of Rs1 crore.
3 LOW CLAIM REJECTION
Generally, claim rejections are lower if the policy has been active for 10 years or more. Shah can buy a policy from any company, but he must make complete disclosures about his health, habits and financials to ensure his family's policy claim is not rejected in the event of his death.
Recently, the Insurance Regulatory and Development Authority (IRDA) has mandated that two years after the policy comes into effect, no insurance company can reject a claim stating non-disclosure of facts.
4 HIGHLY FLEXIBLE
When it comes to term plans, flexibility is one of its many advantages. You can opt for an online or an offline plan. Also, for many online policies, companies do not insist on health check-ups if the cover amount is less than or equal to Rs 50 lakh.
One has to just give a declaration during the application process. Even though Shah will not be able to increase the sum assured during the renewal process, he can always opt for a new plan, as and when the need arises. Besides, he can customize term insurance with optional riders without altering the simplicity of the term plan to provide additional protection to his family.
5 RIDERS
Term plans come with a host of riders which provide extra benefits at a nominal cost. Accidental death, Permanent or Partial disability, Critical illnesses, Waiver of Premium and Income benefits are some of the available options. There is no set rule as to who can avail a plan.
It all depends on one's needs. For example, if someone works on the floor in the heavy industries, a waiver of premium or a permanent and partial disability cover can be explored. Experts say one should not buy a rider just for the sake of it because they come at additional costs. The rates vary from company to company and, therefore, one has to read the fine print carefully and watch out for the exclusions.
6 LOW BROKERAGE
When you buy an insurance policy, the commissions charged by brokers or agents are mentioned under the premium allocation charges. This is a recurring expense. Each time Shah pays his premium, a certain per cent of that money goes to his broker or agent. This percentage would vary from one insurer to another and from plan to plan. In terms of certain term insurance products, the brokerage could be as high as 30-40 per cent of the first premium paid and, thereafter, over a period of time the brokerage cost decreases.
However, for term plans the brokerage element is the least and comes at an average of around 5-6 per cent, according to financial planners.
Most importantly, however, if one were to go for an online term plan, brokerage cost would be nil. Given the uncertainties of life - the not-so-safe roads we travel on or other lifestyle hazards in these days and times - a term plan can save you from a lot of worries by securing the lives of your loved ones. So, buy one before opting for any other financial product.
How much Term Insurance should one take?
While this could vary from person to person, depending on the number of assets one has, a good thumb rule would be between 15 to 20 times your annual income. Another way to look at it is, in case of your timely death, what is the amount which would be required for your family to lead a similar lifestyle?
What should be the Tenure of your Term Plan?
Typically one would argue that the longer the tenure the better it is. I would recommend a tenure till (retirement age + 5 years). With retirement, your income drops dramatically and hence the financial dependency on your income also stops. So there isn’t too much of an insurance requirement as such. Also, longer tenures have higher premiums.
Advantages of Online Term Plans
The benefit of all term plans are the same – whether to purchase online or offline. But the same benefits are available at much cheaper rates if purchased online. I would recommend that you buy online plans because of the following reasons:
- Lower premium rates
- Faster process – Instant policy issuance in some cases
- Less paperwork involved (often paperless process)
- Completely transparent (fill-up the form yourself)
- No health / medical check-up for certain age groups
And one of the mistakes which most individuals make – Rely completely on the employer-provided life insurance cover. Let me tell you how this can go horribly wrong. Suppose you are diagnosed with a critical illness and you need to undergo extensive treatment for the same, which may go into months. You are almost sure to lose your employment and along with it, the benefits of the employer-provided cover. This does happen – so don’t rely totally on it, especially when the premiums are so affordable.
So buy your Term Insurance NOW!
Four reasons why you should buy Term Insurance Policy online
There are tonnes of insurance policies available in the market today. But the question is: which one to go for? However, this question should not pop up in your mind if you have been reading the news lately.
Read this headline carefully: "Investors have lost Rs. 1.5 lakh crore due to mis-sold insurance policies".
The reason why the above headline needs to be read carefully is not to notice that there has been mis-selling from the insurance agents, but the sheer number - 1.5 lakh crore worth of our money has been wasted in dud insurance policies.
For most of us, it's a no brainier that only term insurance is the true meaning of life insurance.
If you are looking to buy term insurance, you would have two modes to do that: online and offline. The online form is increasingly becoming popular because of several reasons. However, there still seems to be a bit of fog left in the path of buying online term insurance. Let's look at some of the factors based on which you can choose the mode of buying term policies that suits you best.
1. Cost
Cost is a major factor while going for term insurance. A lot of online term plans are cheaper by 50-70 per cent (or even more) compared to their offline counterparts. Now, this is mainly due to these two factors:
- There is no intermediary involved in the process. You deal directly with the company and hence, the company's costs are less as compared to the offline mode.
- Companies often believe that the mortality risk is lesser in case of online consumers than offline. As a result, they are ready to offer a lower premium in the online mode.
There have been many cases where consumers complained they had bought online term plans at higher prices just a few years back. The answer is pretty simple: stop paying a premium for the existing policy and opt for a cheaper one, but do make sure that other factors are satisfied too.
(Also read: How and when to exit an insurance policy you don't need)
2. Flexibility
The online mode definitely gives you more flexibility and more options in choosing the required term plan. However, you need to do a bit of homework while buying a policy online since here you do not have the privilege of an agent helping you. This is also a blessing in disguise as in the offline mode you might get a bit lazy and leave it to the agent to the fill the form. There have been cases where agents have misplaced customers' information while filling the form - either intentionally or by mistake. This could prove costly during claim settlement.
3. Claims settlement
If there is a concern in the consumer's mind while buying term plans online, it is this. Also, this concern is very much justified since there is no proper claims settlement data to be sure of this mode. This is because companies do not segregate online and offline claims ratios. Hence, you cannot be sure of the exact number of claims settled online.
However, if you have disclosed all your information rightly, there is no reason for you to be worried about the settlement of your claim. Insurance regulator IRDA has imposed stringent rules on insurers, with one of them being that they need to reject a claim (if any) only within 2 years since the policy was purchased. In case your claims are rejected even after proper disclosure of all necessary information, you can approach an Insurance Ombudsman for justice.
4. Sum assured
The average sum-assured tends to be higher in the online mode, because of the lower costs involved as stated earlier. It can also be due to the marketing skills of insurance companies. It is quite common to see an ad similar to this: '1 crore term insurance for just Rs.500 a month or Rs.17 a day.' More often than not, you would be tempted to purchase an Rs. 1 crore cover even when you don't need it.
Also, for online policies, insurers call for medical tests only if the sum assured is more than a minimum amount, say Rs. 50 lakhs or so.
Conclusion
Based on the above factors, the online mode clearly stands out. It is recommended, however, to calculate the amount of insurance required before purchasing a policy. All the facts related to family or personal health should be declared (even if it means higher premium).
Remember, insurance is based on the principle "Berrima fides", meaning utmost good faith.
The Pros and Cons of Term Life Insurance Policies
Term life insurance policies are straightforward policies that are contracted for a set period of time. Many financial experts, such as Dave Ramsey, consider these policies the best type of insurance, while others consider them to be poor value. Here's a look at both sides.The Pros of Term Life Insurance
These are generally the most inexpensive policies among the many types of policies on the market. They also stay at a fixed rate throughout the contract period. Getting this insurance at a young age ensures a long period with a low monthly payment for the policy. If the contract is for 20 years, the specific insurance amount pays out at the time of the insured's death. There are no waiting periods for this type of insurance, and there are no other fees due. The simplicity and low cost of these policies have made them one of the best deals among insurance products.
The Cons of Term Life Insurance
The major con to buying term life insurance is that it can be difficult or impossible to get if you are in poor health. Once the contract period ends, it may be difficult to renew the policy if there have been health problems during the original contract period. Some people find that they become un-insurable during the contract period and are left after the contract with no insurance at all. There are, however, some policies that have guaranteed renew-ability until a specific age. There may be a high monthly payment due if the insured party smokes, has serious health problems or is obese. These factors can make it difficult to get these policies at all for some people, particularly if they are also middle-aged or older. There may be a health exam to determine the applicant's overall level of health.
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