What will I get at the end of it? That is a question most individuals ask their insurance agent before buying a life insurance cover. In the quest to pocket big money at the end of the term, most customers lose out on adequate life cover. The eye-popping returns, claim investment experts, are nothing to crow about either.
Welcome to the world of term insurance cover , where insurance and investment are two different things. And the twain shall never meet. It is a simple product: you buy a term cover and your dependents will be compensated if something happens to you during the term of the cover. If you outlive the policy, well, good for you. But the insurance company won't give you any cash prize for that.
"It takes time to explain to clients, why they should buy a purevanilla life cover and not treat insurance as an investment," says Sumeet Vaid, founder, Freedom Financial Planners.
The starting point
Once you have decided to buy a pure term insurance policy, the next step is to decide on the term or tenure of the policy. "A single plan with long tenure - ideally covering as much as possible of one's earning years - will prove far more cost-effective than multiple shorter tenure plans taken over the same period," says Suresh Agarwal, executive vice-president, Kotak Mahindra Old Mutual Life Insurance. For example, a 25-year old should ideally go for the maximum term of 30 years rather than take a plan for 10 years and then another new plan after 10 years and so on. The insurance premium increases with advancing age and the medical criteria get stricter, adds Agarwal. In short, buy a cover that will offer you protection till you retire.
The next step is more crucial: How much cover should you have? Here is one way to calculate it - first, write down the amount of your outstanding loans. Second, write down your annual salary. Your sum assured should earn your annual salary after paying for your loans if invested at the rate of 6% per annum. Bit complex, isn't it?
Let us put some numbers to it. You have a home loan of Rs 12 lakh to be paid. Your salary is Rs 10 lakh per year. Multiply your yearly salary (Rs 10 lakh) by 100. You will get Rs 10 crore. Now divide that figure by 6. You get Rs 1.67 crore. Add Rs 12 lakh (your outstanding loan). You arrive at a sum of Rs 1.79 crore or Rs 1.8 crore. So, you should insure yourself for Rs 1.8 crore.
This exercise not only pays off the loan but also ensures that your dependents can still enjoy the same lifestyle even if the earning member is not around. But here is a word of caution. This simple method does not take into account inflation, possible increase in salary and changes in the lifestyle of your family.
"It is better to determine the cover using human life value method described as the net present value of his potential future earning over the rest of one's life span," says Agarwal. It is better go with the human life value calculators that factor in all these aspects. The websites of insurance companies and those of independent advisors such as personalfn.com offer such calculators free.
Enhance the cover
But only life insurance cover is not adequate. You should consider enhancing the cover by using additional riders and some nonlife insurance products. Accident disability benefit rider (ADBR) is one such additional benefit that comes with a minor cost. Consider a scenario where the life assured meets with an accident and loses both legs.
In that case, he may not be employable nor can he pay the premium. ADBR comes to rescue of such a person in this situation. If you are exposed to higher accident risk, consider enhancing the cover. For a tour manager who travels most of the time, it is essential to buy a personal accident insurance policy from a non-life insurance company.
"If you are a person with a family history of critical illness, better buy a critical illness rider. If you cannot buy one at the time of purchase of policy due to paucity of funds, better buy a critical illness cover from a non-life insurance company as early as possible," points out a financial planner working with a private sector bank.
Once you have decided on the term, sum assured and the additional covers that you want to buy, the big question that follows is: "Which company to buy from?" Experts make it clear - buy from an insurance company that you are comfortable with.
"If you are buying an insurance cover of Rs 1 crore, you could split it between two companies," says Vishal Dhawan, founder, Plan Ahead, Wealth Advisors. He explains that if you wish to discontinue a policy after some time, since you would have met your goals, then it is easier to let go of one policy. If paper work and medicals bother you, you could look at going online.
In many cases, the insurance company will arrange for your medical tests at a later date. Many companies offer door-step services for pathological tests in certain cities. Along with the convenience, you may get to enjoy some premium discounts depending on the age, tenure and sum assured you choose if you opt for the online mode. So choose the path you are comfortable with.
Maintain your cover
Last but not the least you may choose to pay the premium using the monthly mode. But ensure that you pay your premium by a standing instruction on your bank account. This ensures that the policy remains in force. If the policy lapses, reviving it is a task in itself. More important, keep your dear ones informed about the policy.