When we build financial plans for our clients, the first thing we take care of is insurance - both life and general.
Not everyone needs life insurance, but if you have financial dependents and you need to plan for their life goals and/or if you have liabilities like a home loan or a personal loan, then you’re one of the people that does.
Buying insurance is very important for each and every individual, so selecting the right insurance policy is also very important. Selecting the right insurance product according to your requirement is a very difficult task for anyone. There are many sellers/companies in the market and all of them have their own variety of insurance products. It becomes more difficult for you to select the right product when you receive at least one call per day from different insurance companies and all of them claiming that they have the best product available.
When buying insurance, don’t go by what insurance companies or agents or your family members or friends are telling you. Don’t even buy insurance by looking at which product is doing best in the market.
Buy insurance only when you know that there is a need for the same. First analyze what you are looking for from the insurance policy. Here are some points which you should keep in mind before buying an insurance policy:
- Are you buying insurance for protection purpose?
- Are you buying insurance for investment purpose?
- Are you buying insurance just for saving TAX?
Different policies available in the market cater to different needs. Therefore, don’t buy insurance for the sake of buying it; buy insurance because you need it.
There are 2 types of insurance broadly available:
- Life Insurance
- Non-Life Insurance or General Insurance.
In this article, we’re going to look at Life Insurance - particularly term plans - in some detail, so that you have a more thorough understanding of what the various features are and what they mean.
LIFE INSURANCE - TERM PLANS
Human life is at the risk of death due to natural or accidental circumstances. When a person dies or becomes disabled then there is loss of income for the family. The survival for the family can become difficult. To protect your family from such a situation, you can opt for a straightforward life insurance policy.
Your life is certainly priceless to your family members; however it helps to put a value to the life of the breadwinner in the family, so that in case of any unfortunate circumstance, the family members do have certain income that they will receive. Life insurance policies provide a definite amount of money to the dependents of the insured in case the life insured dies or becomes disabled. Life insurance comes in many forms. The first form is one of pure protection. However with advancements in the insurance field, modifications have been made to the classic term plan to include savings and investments as well. The types of life insurance policies are as follows:
- Term Insurance (Pure Insurance)
- Endowment Policy (Savings based)
- Money Back Policy (Savings based)
- Unit Linked Insurance Plan (ULIP) (Savings based, market linked)
Let’s look more closely at the purest form of insurance - the Term Plan.
Term insurance is the purest form of insurance policy. It provides you a high amount of coverage at a very low premium. This type of policy caters to the need for protection. A Term insurance policy provides you the coverage for the specified number of years by paying the small amount of premium every year. Generally term insurance policies are for the duration of 10, 15, 20, 25 or 30 years.
In case of your demise during the duration of the policy, the amount of coverage taken under the policy is payable to your nominee.
In case you survive the policy term then nothing is payable at the time of maturity.
The premium paid qualifies for deduction u/s 80 C.
Now the insurers are charging different amount of premium depending upon the risk profile of the person taking the policy. For example, your risk profile will likely be assessed on the following parameters:
- Medical History
Your medical history and that of your family is a crucial factor that insurance companies take into account while assessing risk. If you have any existing (and possibly life threatening) diseases at the time of taking the policy, then the insurance company will charge an extra premium known as ‘loading’, as the risk to insure you increases in comparison to insuring a person without any pre-existing diseases.
- Non-Medical History
Apart from medical history, life style habits such as smoking, drinking, occupation etc. are also taken into account. Generally the premium of a client who has a smoking habit is higher as compared to a non-smoking client.
Certain term insurance policies are also available with additional benefit known as riders:
- Accidental Death Benefit Rider
In this type of rider a small amount of extra premium is being charged with the regular premium and if a person dies due to an accident, then he gets an additional benefit in the form of increased sum assured. If a person dies because of some other reason than accident, then the sum assured under accidental benefit rider is not payable.
- Return of Premium
In this type of rider the premium amount for the policy is much higher than the regular premium and all the amount of premium paid during the policy duration is paid back if the life assured survives the policy term.
- Waiver of Premium
In this type of rider if the life assured becomes permanently disabled, then he/she does not have to pay future premiums, all future premiums are waived. Insurance companies charge a nominal fee for this rider. This rider might increase the cost of insurance, but means that you won’t be left without coverage if you are no longer able to pay the premiums.
For e.g. Mr. A has taken a term insurance policy with waiver of premium as a rider. Thereafter he was badly hurt in an accident which left him disabled. In this case, thanks to the Waiver of Premium rider, he does not have to pay the remaining premiums but his policy will continue as before.
- Critical Illness
In this type of rider if a major disease (as specified in the insurance policy) is diagnosed within the term of the policy then an amount equal to the sum assured in the critical illness rider is disbursed. The important thing to note in this rider is that if a critical disease as specified under the contract is diagnosed then a lump sum amount is paid out. This rider is not to be confused with a Mediclaim policy, in which hospitalization expenses are paid.
Most critical illness riders have a waiting period of around 90-180 days after you buy the policy. During this waiting period no claim can be made for critical illnesses. Further, even after the critical disease is diagnosed, the insured must survive the minimum of 30 days in order to be eligible for the claim.
Remember, taking life insurance is more than just identifying a policy and paying a premium annually.
It's also important to separate your insurance from your investments. Investments into mutual funds, bank and corporate FDs, and other instruments will help you grow your wealth, while insurance helps you protect your loved ones and yourself. Do be sure to read the policy document and understand all the various features within it. And remember if you have any queries, Call PFN and we’ll be happy to help.