In these times of high inflation, Rs 20 won't buy you much. But it is enough to buy Gopal Gidwani a term insurance cover of Rs 49.99 lakh. The 38-year-old Pune-based professional pays an annual premium of Rs 7,652 for the Anytime online term plan from IndiaFirst Life Insurance he bought two months ago.
Term insurance policies have become very popular in the past 12 months. "Premium rates have come down, companies are advertising term plans in a big way and the online channel is very convenient. This is why sales of term plans have shot up," says Amitabh Chaudhry, CEO and managing director of HDFC Life. The company launched its click2protect online term plan earlier this year. Aviva Life Insurance, which launched its i-Life plan in May 2011 has sold more than 18,000 policies in the past 10 months. Aegon Religare Life Insurance has sold nearly 25,000 i-Term plans.
Financial planners contend that a term plan is the best form of insurance because it gives a very high cover at a low price. The premium of a term plan is a fraction of what you have to shell out when you buy an endowment plan, a money-back policy or a Ulip with the same coverage. Of course, this is also because there is no investment component in a term plan. The entire premium goes in covering the risk. Before you buy a term plan, here are a few things to consider.
How much cover do you need?
Life insurance is meant to provide the dependants of the policyholder with enough money to replace his income in case he dies. Your life insurance must take care of the following things: the basic expenditure that your family will incur, major expenses like marriage of children and other liabilities like loans. If the life cover is inadequate, it defeats the whole purpose of insurance. For instance, a good part of the Rs 12.5 lakh insurance cover that Michael Fernandes (see picture) has will go into paying the Rs 3 lakh car loan that he has recently taken. The Goa-based sole breadwinner of a family of four needs an insurance cover of at least Rs 30 lakh. Turn to page 5 to know how to calculate your life insurance needs.
Till when do you need the cover?
The tenure of the term plan is almost as important as the amount of cover. An insurance policy should cover a person till the age he intends to work. Till a few years ago, this was 60 years. "However, a person may continue working beyond the age of 60," points out Andrew Cartwright, chief actuary, Kotak Life Insurance. Moreover, late marriages and having children at a higher age mean responsibilities do not end at 60. Experts believe a person needs a life cover till at least 65 years, though it may vary according to circumstances.
Don't take a short-term cover of 15-20 years that ends when you are in your 40s. The premium will be very low because you will be insuring yourself for the non-risky years. In the 40s, the need for life cover is at its zenith. If you take fresh insurance at that age, it will cost you a bomb. You might even be denied the cover if you have not been keeping well.
Choose a term plan that offers you the flexibility of fixing the tenure. Many online term plans come with fixed tenures of 15, 20, 25 and 30 years. Others don't offer insurance beyond 60 years. So, a 32-year-old will not be eligible for a 30-year-plan and will have to buy a 25-year cover, which will end when he is 57 years. It is best to avoid such plans and opt for a policy that can be customised to your needs.
Mumbai-based Vivek Kumar has configured the tenures of his five term plans in a way that they match his financial goals. Whenever a goal is achieved, the corresponding term plan terminates. "I have tried to ensure that in case I am not around, my daughter's education and marriage will be taken care of," he says.
Have you factored in inflation?
Have you bought a Rs 50 lakh cover and think it is sufficient for you? Think again. The value of Rs 50 lakh will only be Rs 28 lakh after 10 years assuming an inflation of just 6%. To get around this problem, some insurance companies offer plans where the cover increases by 5-10% every year or is indexed to inflation. "As your sum assured would automatically increase in the coming years, it would take care of the increase in your income as well as inflation," says Rituraj Bhattacharya, head, product development and market management, Bajaj Allianz.
Inflation is high right now but may scale down in the coming months. The long-term average inflation in India is expected to be 6-6.5%. "A 5% increase in the insured amount won't match inflation. If you must go for such plans, opt for either a 10% annual increase or an index-linked one," says Cartwright.
Kotak Life Insurance offers a plan that allows you to increase your sum assured at certain stages of your life. You can raise the sum assured by up to 50% when you marry or buy a new home. A 25% increase in sum assured is allowed on the birth of a child or the first, third or fifth anniversary of policy purchase. However, your revised cover cannot be more than three times the original sum assured.
Keep in mind that the premium of such plans is higher than that of an ordinary plan. A more cost-effective solution is to review your insurance needs at every life stage and add more cover if required.
The opposite of an increasing cover is a plan where the cover comes down. Such plans are meant to cover big-ticket credits such as a house loan. The cover comes down as you repay the loan and eventually ends. Here again, experts recommend a simple term plan than go for complex offerings.
The return of premium plan, for instance, is a sham that gives the buyer the total premiums paid at the end of the plan, but the inflation-adjusted value of this sum is meagre. Paying a higher premium for this benefit is not advisable. Likewise, the single premium option is not a good idea because it frontloads the entire cost of the cover. In case of early death, the premium for the rest of the term goes waste. In a regular plan, the buyer gets the same insurance benefit by paying far less.