This is why you should cherry-pick a life insurance product

Abhijit, one of my close friends, was working with a private firm and leading a happy life with his wife and daughter and widowed mother. He had a car on EMI and was planning to purchase a small flat with home loan.

One morning, I got a call from his wife that Abhijit has left all of us. He was only 35 yrs old and died of a heart attack. I was shocke. I rushed to their house with my wife. It was a painful morning. After all the rituals were over, I met his wife, Swati who was a distant relative of mine. She looked devastated. Swati brought a covered file which contained all his investment and other papers. She is an Economics graduate and I was sure she has gone through the file. I diligently went through the FDs, Mutual Funds, PF documents and Insurance papers. 

Abhijit had a number of Life Insurance policies. From the dates, I could understand those were bought during Jan-March (For tax benefit- I presumed). He was paying almost Rs 70,000 but his life cover was hardly Rs 12, 00,000.  As per the agent they will get approx Rs 15, 00,000 (including bonus and other benefits). All the insurance policies were endowment or Money back Policies which were sold to him by pushy Insurance Agent. Now, Rs 15 lakh is totally insufficient considering the fact that he left behind an aging mother, a little baby girl (her education, marriage), EMIs on car loan and on top of that the house was a rented one.

I narrated this incident as many of you might have come across similar instances in your extended family or friend circle. Actually, you die only once but if it is untimely, it can be devastating for your loved ones whom you are leaving behind. So it is prudent to have an adequate cover for life (you get tax benefits in case of any eventualities).

Understanding Life Insurance Products

Mostly you get three types of life insurance policies – Term Policy, Endowment Policies & Unit Linked Insurance Policies (ULIP). Let us understand endowment policy first.

“An endowment policy is essentially a life insurance policy which, apart from covering the life of the insured, helps the policyholder save regularly over a specific period of time so that s/he is able to get a lump sum amount on the policy maturity in case s/he survives the policy term. 

A life insurance endowment policy pays the full sum assured to the beneficiaries if the insured dies during the policy term; or to the policy holder on maturity of the policy if s/he survives the term.”

So, if you are 34 years old and willing to pay premium of Rs 50,000 for 10 years,  you may be covered (assured ) for Rs 500,000 (generally 10 times) for 20 years. Besides you will be entitled to “bonus” etc (Rs 12 Lakh). This “Bonus” sounds very appealing and most agents try to exploit and sell you an endowment product.

Actually, a part of your premium goes to cover your life risk and balance is invested and you get a return of Rs 12 lakh after 20 years. (Generally these returns are approx 5% (+/- 1%)

Unit Linked Insurance Policy (ULIP)

ULIP is similar to endowment policy with some other features. Here, after deduction of risk charges, the investments are made in equity, debt market and they are disclosed. So you get a market-linked return depending on Fund manager’s performance.
Now let us look at Term Policy.

Term insurance is a life insurance policy which offers financial coverage to the policyholder for a specific time period. In case of death of the insured individual during the policy term, the death benefit is paid by the company to the beneficiary. 

So if you are 34 years old and you want cover for 26 years and for  Rs 50,00,000, premium will be approx Rs 10000. 

(Figures could be different. They are mentioned for example purpose only. For exact amount for your age and the coverage, you can check the website of the companies).

With Term Policy, you can cover a large amount towards life risk- (Your nominees will get large sum of money) in case of your untimely death. In endowment policies, you get less return (Compared to other investments) as well as less risk cover.

However, in standard Term policies you don’t get anything in case you survive the policy period. But that’s a small price you pay. Of course nowadays you get different policies which return your premium amount in case of untimely death (called “Term Return of Premium- TROP)

Actually, Term plans provide pure life cover. This means there is no savings/profits component. Since term life insurance plans are more affordable it is possible for an individual to opt for a higher life cover for the same premium as an endowment plan. For example, a 30-year-old can get a term plan with a cover of Rs 1 crore for a 30-year term by paying a premium.

The Rs 1 crore endowment plan will most likely be out of bounds for most 30-year-olds. However, taking a term plan for a similar cover is relatively more feasible. So, don’t mix up risk cover and investment. Go and buy a Term plan and create financial security for your family.

Most of the Insurance companies also offer 

1. Riders - Critical Illness Plan

The policyholder can attach riders to the term plan, thereby enhancing the utility of the policy. So by opting for a critical illness rider or a critical illness plan, for instance, s/he is entitled to receive the sum assured on being diagnosed with the critical illness. This is in addition to the death benefit of an equal amount on death over the term of the policy. 

(There are other riders to choose from, like - loss of employment cover, disability cover, waiver of premium cover, among others. The policyholder should select riders based on his/her specific needs to make the life cover more suitable and meaningful.)

2. Enhanced cover

Certain insurance companies offer the flexibility to enhance the life cover during critical stages of the policyholder's life. For instance, the policyholder may be permitted to enhance life cover by 50% at the time of marriage and by 25% at the time of turning a parent. This makes it possible for him/her to start with a modest cover and then enhance it as responsibilities increase as also the ability to pay higher premium.

How much Life Cover one should buy?

Let’s work on some numbers. Tanay has a take home salary of Rs 70,000. His monthly expenditure is Rs 50000, EMI obligations are Rs 15000. He also has some saving in the PFs, MFs and Bank deposits (FD). If Tanay dies, all the recurring expenditure remains. So, he should divide his requirement in two parts - Obligations and family expenses. He should take a Term policy for the obligations. So, in this case if his outstanding loans for which he is paying EMIs is Rs 25,00,000, he should buy a separate Term policy for that amount. (Though sometimes home loans bundle term insurance also, it is prudent to find the cost of the same and compare with stand alone term cover)

If your wife is a home maker, you should take a policy with such a sum assured that with investing that amount in FD or Postal Deposit she can get the monthly expenses in hand.

I have given the broad guideline. Now you can work on this based on your age, occupation, dependants and outstanding loans. The taxation part will be covered in a separate article. 

(Visit all the websites, consult with a reliable financial advisor/planner and buy a TERM PLAN)

With reserve fund for 6-12 months, adequate health insurance and life cover, rest assured you have created the safety net for you and your family. 

By Binodgopal Mukherjee

(DISCLAIMER: The views expressed are the author’s own and have nothing to do with OTV’s charter or views. OTV does not assume any responsibility or liability for the same.)