The reason for writing this blog post is because I got some spare time to read Economic Times Wealth supplement last week. The main focus of that issue was on Term Insurance Plans. Which ones to buy, what is the need? I largely attribute the info expressed in this article to the ET Wealth info. Please refer to the issue of February 3-9, 2014 for more details.
The article starts with a very thought provoking statement. Imagine if someone's salary reduces by 1%, it might not be noticed. If it reduces by 10%, maybe little effects are seen, if it reduces by 25% lot of lifestyle changes take place and one will alter to accommodate within the available amount. But, what if the whole 100% of the salary vanishes!! Such a scary thought right. If something happens to the main bread-earner of a family, the whole family will plunge into a deluge. All future plans will get affected, for about fancy plans, the basic day-to-day survival becomes pretty difficult. Trust me I had someone very close go through such a grief. So what can one do to protect family and dependents from such a catastrophe. We might have seen lot of innovations in the mutual fund offerings, bond market innovations, similarly I feel that this TERM INSURANCE is kind of innovation in the life insurance policies. By paying as less as 1% of your earnings, one can secure the complete 100% salary even in case of any emergency. The premium amounts are usually as low as 22-25 rupees per day if you take at an early age.
So what are these Term Insurances? What is the need, when there are other insurance products available in the market? What advantages do these provide over the traditional policies? Which policy should one buy? Maybe these are the possible questions already cropping in your minds. Let me try to provide clarity on some of them if not all.
To begin with, the returns from traditional insurance policies are not at all worth in this age of rising inflation. Usually the policies like LIC have a very low return of around 5-6%, and the ones that are market linked - forget about it - they are as certain as Rohit Sharma's innings ;-). So it is in this context, that the term insurance policies become very attractive and worth investing in. I will try to provide certain bullet points, probably by the end of which all your questions might be answered. Btw, these term insurance plans are hated by insurance agents, as they don't have much provision for commission and also one term plan covers whole lifetime.
1.Online Term Plans v/s Offline Term Plans:
Online term plans are approximately 30-40% cheaper than the offline term policies. Some of you might be skeptical as to how can the online plans be 30% cheaper premiums, there must certainly be some catch. Let me assure you, there is no catch. The online plans are cheaper because, there is no commission involved to any agents, from the insurance companies' point of view, the person buying a online plan is a educated, reasonable earns well, is concerned about protection, in case of emergency has easy access to healthcare. So because of these factors the online plan customer is a low risk customer for the company. So the company is justified in giving the benefits to the customer.
2. Increasing Insurance cover:
In certain plans there are these options where your term coverage will increase by 5% on the base every 5 years. For example, suppose you have bought a policy for 50Laks, after 5th year, your coverage will be 55Laks. But as per ET Wealth, it is better to go for a full regular term plan rather than the increasing cover. The need for the insurance is more in the middle age 40-55years, when the committment are more. If any emergency situation occurs in the first 5-9 years, the coverage will be less, whereas in the traditional policy you will have the full coverage. Also if you calculate the premium paid in both the cases, it is very much negligible.
3. Single Premium:
It is advisable to go for a regular premium than the Single Premium, because, if you keep the lumpsum Single premium in a FD, the interest earned can be used to pay the regular premium yearly. Also there is one more argument, if any emergency situation happens in the initial years , you would have paid the full premium, whereas in the regular policy you would have paid only for few years. Also one needs to take care that the premium is paid on time every year. If the premium payment is missed, the policy lapses. So it is better to opt for a ECS bank payment or some sort of reminder every year.
4. Staggered Payouts:
This option is useful in case the nominee cannot handle the large sums. The payout is spread across certain stages when the money is disbursed.
5. Return of Premium:
According the ET, this option is not much useful. As the premium you have to pay for this kind of policy will be very high, almost double. Also if you take into effect the inflation over the years, the return of premium will have meager value after 25-30 years.
There might be one more concern about the Claim Settlement Ration. This is one of the important factor. But one need not worry much. If you have declared your health conditions correctly at the time of buying a policy, there are very less chances that the claims will be rejected. So please be frank in admitting any health condition.The premium might be little higher, but will be secured against claims rejection. Also please opt for any policies which require health check-up. Health checkup in a way provides a guarantee to the insurance provider about the customer, so the premiums may come down a little.
So all said, which one is the best term policy available? There is no single answer. There is a huge list of companies providing various options in investing. Please go through the list compare the features, prices and then decide. You can find the list here.
http://www.jagoinvestor.com/2010/12/term-insurance-plans-comparisions-india.html
Also I would like to thank ET Wealth for such a comprehensive article for the benefit of the readers. You can refer to the complete article here http://economictimes.indiatimes.com/personal-finance/insurance/analysis/insurance-cover-which-term-plan-is-for-you-/articleshow/29701605.cms
