The importance of life insurance is un-debatable in our financial lives. The death of bread-earner does not create only chaos in the lives of family members as emotionally but also more hit financially. Since uncertainties of life could not be avoidable, the family should have enough financial capacity to continue living without depending on relatives and friends. Though Life insurance is the ultimate answer to avoid a financial crisis for the family, most bread-earners are confused about which one to buy. So, they remain uninsured or underinsured or fall into the trap of endowment/ULIPs. Last three years, there have been several changes in the offerings of insurance products; many insurance companies have come up with variants and extra benefits of term plans, based on one’s specific financial situation. However, agents are still keen to sell investment-cum-insurance products due to higher premiums which are not in your interest to focus on pure risk cover which is offered by term plans.  Since an offline term plan is two to three times more expensive than online term plans, online buying is an opportunity to get comprehensive coverage at lower premium. But is it really worth buying it? What should be an ideology to buy online term plans? Read it.

ideology

Term plans linked to financial commitments

Each individual is unique and has distant financial commitments such as paying loan liability, immediate cash need, children’s education and their marriages and in above all, regular expenses to meet livelihood of family on the demise of bread-earner. Hence, we cannot go by a ‘one-size-fits-all’ solution. So, how much of insurance coverage is enough to ensure that your family can continue to maintain the existing lifestyle and meet your financial commitments? The general thumb rule for insurance cover is 10-12 times the annual salary plus liabilities minus your current assets. And insurance companies today can offer only cover up to 10 to 20 times your annual salary. For instance, if your annual salary is Rs 3 lakh, insurance companies will restrict your cover to between Rs 30 lakh and Rs 60 lakh but what if your insurance requirement is more than Rs 60 lakh due to higher financial commitments, say Rs 1 crore. In this case, you will have to make a proposal to different insurers and see if they accept your request for higher cover or not. But do not assume that you will get cover of Rs 1 crore, even you have ability to pay annual premium for that coverage. Because insurance companies are wary of giving excessive cover as it can also invite possible cases of fraud.  They will ensure that it is not meant to make profit from the death of the bread-earner.

Go for lump sum with benefits income distributed overtime

In the unfortunate death of bread-earner, getting a lump-sum benefit for the family ensures that the family could achieve their future financial goals and commitments but it might be possible that the initially-available corpus could not meet your regular expenses over time due to low profile income. In such a scenario, many insurance companies are offering today is a combination of partial or full sum assured (SA) as a lump-sum and 0.5% of the sum assured as regular flow of monthly installments with an increasing payout at the rate of  10% every  year over 10 years.  This will adjust for your regular expenses to account for inflation. This could prove be invaluable option for those who want to get insurance coverage more than 20 times of their annual salary due to high financial commitments.  The additional benefit of getting a lump-sum as well as monthly payout is that receipts in both cases are tax-free. In case you get only a lump-sum, the income generated from investment of the lump-sum in safe products, like fixed-deposits (FD) with scheduled commercial banks, would be liable for taxes. The family’s financial literacy is important while choosing a lump-sum benefit term plan versus income distributed overtime. Even financially literate people find it difficult to keep money safely, if they get a large amount as a lump-sum. The consistent income overtime can prevent a situation where the recipient fritters away lump-sum payment and will help the family to stabilize and live with dignity.

Busting the myth of Medical Test

Most insurance companies ask for medical test, even at younger age for their online term plan. Some may not need medicals, especially below sum assured of Rs 50 lakh or even at Rs 1 crore, based on your declaration. While buying the non-medical product online, the cover is either accepted or declined by company. Many people, rightly, give importance to products which have medical tests. Some insist to insurance companies for undergoing their medical test to ensure their claims. But the truth lies that medical tests are not a substitute for utmost good faith in declaration. Death claim can get rejected even if all the medical tests were done. The fact is that medical tests cannot report all the conditions. Proper declaration of individual and family medical history along with medical tests will help you ensure minimal issues for death claim payment. Moreover, the premium for the non-medical plan is higher than that for the medical plan option.

Stay away from the life insurance riders

Some term plans are offered by the riders as personal accident (PA) policy with not much price difference. The rider add-ons with term plan does not give you a comprehensive coverage, it covers only permanent total disability (PTD). Buying a separate PA, instead of life insurance riders, is an advantage due to wider cover of disability such as permanent partial disability (PPD) and temporary total disability (TTD). Many claims under PA policy come under TTD and, hence, it is a feature worth paying for even with additional premium. In most accidents, the insured misses work and, hence, can claim loss of wages under TTD. The premium for a PA policy does not change with age. If you buy riders along with a term plan, ensure that the premium you will pay for riders does not change with age. Don’t choose term products based on riders. Choose the right term life insurance without thinking about the riders.

Choose Regular Premium option

Though single-premium term plan will offer a discount over the regular premium that you will pay for the years of policy term, it is much higher than the time value of money. While opting to single premium, you pay the lump-sum amount at one go which is locked for the entire policy term which can be 30-35 years. But what if the policyholder dies before the agreed term, all remaining amount will go waste and may get more cost you. Regular premium would be have definitely score over single premium as it saves a lot of money in this case. It is not like medi-claim where the premium can increase each year. It means that you know exactly how much regular premium you will pay over the lifetime of the policy. In the meantime, if you find a better term life product in the market, you can easily buy it and discontinue paying premium of the existing term plan. Why pay a single premium and get locked for the policy term?

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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