Life Insurance is like a swimsuit for a diver 🏊♂️
Life Insurance is like a Screen guard for your smartphone 📱
Life Insurance is like shoes for your foot 🚶♂️
Just like a swimsuit is important for a diver, having good life insurance is important for your family.
Though you cannot be reborn, life insurance can help your family to avoid financial crisis and lead a life comfortably
I hope this post will help you understand the concept of life insurance and which type of life insurance is the best one for your family
But most people are confused with:
- Why should you have a life insurance plan
- Which is the best life insurance policy for you
- Should you take a money-back policy or Term Insurance Policy
- Should you purchase a single life insurance policy or multiple policies
- How much insurance coverage should I need
- Which type of Insurance to purchase
How much Insurance coverage should you have
Back to basics, life insurance is a protection of income in case of the unexpected demise of an income-earning person in a family.
“Hence life insurance is needed only for earning person and life insurance is not needed for non-earning people in a family”
Next comes deciding how much insurance coverage should you have, it boils down to 3 factors:
- Your current age and life expectancy
- Your liabilities
- Your expected age at retirement
- Your expected earnings till retirement
There are various ways to arrive at how much coverage should I have
So let’s discuss with an example, Santhosh aged 31 years a healthy person having a son aged 3yrs
with an annual income of Rs 28 lacs, monthly expenses of about Rs 35,000, a housing loan liability of Rs 52 lacs, and his son’s educational costs are assumed at 40 lacs.
Santhosh wants to retire by 55 and life expectancy till 85
In case, if Santhosh is not there today his family needs
- Rs 52 lacs for home loan repayment +
- Rs 40 lacs for son’s education expenses +
- Monthly survival expenses = Rs 35000 * 12 * 54 = Rs 2.3 crores (spouse & son survival expenses)
That comes to total of Rs 3.1 crores
Santhosh needs at least 3.1 crores of life cover to make his family safe from financial troubles if he is not there today.
Let’s dive into the different types of life insurance plans (policies):
Insurance companies sell a wide range of life insurance plans which can be broadly categorised into the following:
- Endowment Policies – These insurance policies are basically saving plans, you pay the premium and get insurance coverage and at the end of the term period insurance company pays you some money. The problem with these kinds of policies is that to get three crores of insurance cover, Santhosh needs to pay around Rs 15-20lacs per annum, almost equal to Santhosh’s annual income.
In these endowment policies, the premium is very high, and life cover is very low, and the returns at the end are very low; the returns are around 3 to 5% per annum which you can get by keeping money in the bank fixed deposits as well.
Examples of endowment policies include Jeevan Anand, Jeevan Labh, Jeevan Saral, HDFC Sanchay, Jeevan Ankur, SBI Life Shubh Nivesh, ICICI prudential GIFT Guaranteed return Plan etc
- Unit-Linked Insurance Plans (ULIPs): ULIPs are again a mix of Insurance and savings and investment plans. Mortality charges are deducted from the premium you pay and the rest is invested in equity or bond markets per your choice. The devil is ULIPs is that there are many other charges that eat away the returns and with market fluctuations, the returns could get negligible or many times end up in a negative zone (losses)
Some of the charges ULIP policies could charge the policyholder are: Annual Maintenance charges, Fund management charges, switch over charges, Premium Allocation charges, Policy Administration Charges, Partial Withdrawal Charges, Premium redirection charges, Mortality Charges, and Premium Discontinuance Charges.
All these charges get deducted from the premium you pay, and the rest of the amount only gets invested. Now you can imagine how many charges you pay and how less is your invested amount is. Some of these charges get deducted every month; if you have invested in any ULIP, please open the statement since inception and see all the costs in your account statement.
For Santhosh to get Rs 3 crores life cover, he may need to pay around life insurance premium of around Rs 10-15 lacs per annum as ULIP premium, which is a pretty significant amount.
- Term Life Insurance Plans and Policies: Term life insurance is the purest form of life insurance that covers only risk; that is, the nominee gets paid only in case of your demise. The amount of money paid to the nominee will depend upon the life insurance coverage that you take
There is no maturity, meaning you don’t get even a penny if you are alive at the end of the policy period. Many people focus on the point that they won’t get anything in return; why should I take term policy.
Let me explain to you, my friend
- Have you ever had car insurance or bike insurance?
- Have you ever had Mobile or Travel insurance?
- Have you ever had Health Insurance or paid health insurance premiums in your organisation?
- Have you ever paid a small fee to safeguard your chappal near a temple?
If you have come across at least one of the above scenarios, you will understand that you won’t get any refund once you avail the service,
Think similarly for life insurance, you pay a small fraction of the amount for a considerably high life cover the insurance company offers.
In the case of Santhosh, he may pay around Rs 50,000 per year for life cover till 70 years of his age. The early you take term insurance the less premium it will be.
In endowment policy, Santhosh may need to pay around Rs 15lacs per annum but in term insurance its only Rs 50,000 per year
In ULIP policy, Santhosh pays around Rs 12 lacs per year but in term insurance its only Rs 50,000 per year
Santhosh knows that his family will fall into financial crisis if he doesn’t provide 3 crores, but he doesn’t have 12 to 15lacs every year to pay for ULIP/Endowment premiums that give him Rs 3 crore coverage. Hence suitable life insurance for Santhosh is term insurance which is the cheapest and best life insurance solution to protect his loved ones
More details about Term Insurance Plans:
Term Life Insurance plans offer a range of life protection features and riders making you more confused about what to opt for and what not to opt
- Term Life Insurance is provided only for earning people, You should disclose your earnings with bank statements or ITR statements and based on your income profile Insurance companies decide how much insurance coverage the person is eligible for
- Another question you may have is, till what age should I take term insurance.
- You should take life insurance coverage till the age you may want to work
- Till the age your liabilities become zero
- Till the age your kids settle
- Who doesn’t need Life Insurance ( not only term but any sort of life insurance is not required for the following people )
- Retired people
- Parents or in-laws who don’t have any financial responsibilities and liabilities
- There are many features in term insurance, which one should be opted and which shouldn’t:
- Return of Premium: If this rider is selected, at the end of policy tenure if the policyholder is alive, he/she will get their premium back after removing the GST tax component. If you understand the time value of money you know that you lose the value even though the number is the same, hence please avoid this rider.
- Disability Rider: This feature provides some money to policyholders in case of disability. There are different types of disabilities and based on the conditions of the rider the amount would get released. If you need disability insurance, please take it separately and don’t mix it with term insurance
- Critical Illness Rider: In this rider, if the policyholder is diagnosed with any pre-defined critical illness and survives 30 days from the time of diagnosing, then the policyholder can submit a claim to the insurance company and receive the amount declared under Critical Illness.
- If you need critical illness insurance coverage, please take it separately, its highly suggestible not to include it in term insurance
- Accident Rider: In this rider, the nominee gets double the sum insured in case the policyholder dies due to an accident. opt this rider if you are in a profession which requires a lot of travel
- Lumpsum disbursement or monthly or partial disbursements: There are options with a few insurance providers where the amount will be paid to the nominee in multiple chunks over a period of time upon death of life assured
- It is always good for a nominee to receive the lump sum amount in one go, so in my opinion partial or monthly disbursements should be avoided
- Premium Loading: Loading of premium is nothing but to insure a person who is not healthy there will be more risk for an insurance company. In financial terms, higher chances of the risk happening than a healthy person living a comfortable life, hence insurance providers charge more premium to people who have a medical history like smoking, taking alcohol regularly, people with heart/lung/kidney problems, people with a history of surgery etc
- Increasing Coverage: Some companies offer a term insurance policy which has the benefit of increasing coverage based on life stages like childbirth, getting married etc.
- Tax Benefit: You can avail tax benefit for the premium paid in a financial year under 80C section of Income Tax Act
- Premium payment options: there are different policy premiums & payment options to choose from:
- Single Premium
- Limited for 5 years
- Limited for 10 years
- Limited for 15 years and so on
- Regular pay yearly
- Regular pay half yearly
- Regular pay monthly
While there are multiple choices, it’s always good to go for yearly regular pay, also you can opt for 5 or 10 years if it gives you peace of mind.
All about Claims in Term Insurance:
A life insurance company in India should follow rules as stipulated by IRDA. You buy life insurance to ensure your loved ones don’t have to go through financial stress and affect their lifestyle. During the life insurance application process you nominate a family member to receive the financial benefit the policy offers. Upon the death of the life assured, the nominee has to notify the life insurance company to receive the financial benefit. In the case of term insurance its a lumpsum money
The nominee has to notify the life insurance company, this is done using a process called Insurance Claim where the details of policy, person demised and other components need to be filled and submitted to the life insurance company for further processing
The insurance company will get back to nominee if any further details are required and will perform a formal enquiry about the event of death, cause of death etc
In the case of term insurance the sum insured is a lot high, hence insurance companies do a thorough check and ask many questions to nominees. Your nominee should be in a position to provide satisfactory information to the insurance company for processing the claim.
Unknown Nominee: In most cases what I observed is that the nominee is not aware of the existence of such term insurance policy and the nominee may not know the benefits of the policy and how to handle the claim processing. So just like taking term insurance is important, the most important thing is to inform your nominee about the policy and its features and benefits
Hiding Facts: A life insurance contract is a note which is a mutual understanding between both parties policyholder and an insurance company. Another aspect of life insurance applications that I observe is, that people have the tendency to hide facts while purchasing life insurance to reduce the premium payable. However, your policy can become void, and the claim will be rejected if the insurance company comes to know about the hidden facts.
You might think, how the insurance company will know the hidden facts? Well, they have their ways of fetching information from your nominee.
Do you want your loved ones to suffer with the claim not being paid because you didn’t disclose material facts is the point that you should worry about
I hope this helps in better understanding of life insurance in general and term insurance with its features, limits and caution that you need to take while applying for Term Life Insurance.
Disclaimer: The numbers and names are generalised and doesn't represent any person or company. Please consult authorised personnel before buying any life insurance. Fundviser or its representatives doesn't hold any responsibility for financial or personal loss that might occur by taking decisions based on your self-assessment in reading this information.