Riders provide additional protection to the term insurance plan.
Rajiv Jamkhedkar, MD and CEO of Aegon Religare Life Insurance, throws light on the necessity of term cover and also on factors that need to be kept in mind while taking a policy, in a conversation with Business Line. Excerpts:
What are the risks that a term insurance policy seeks to cover?
A term insurance plan seeks to cover the risk of death. In case of the policy holder’s demise, his/her nominee or beneficiary receive the sum assured. It is important to understand that insurance is not an investment. It is a financial instrument that covers the risk of death and everybody should have adequate insurance.
How does an investor decide on the amount for which the cover must be taken? What factors must be borne in mind?
The amount of protection one needs differs from person to person and there is no fixed formula to determine or calculate it. However, it is imperative to ensure that the amount of protection suffices the living expenses and lifestyle of the policy holder’s family in his/her absence. The amount should also support the beneficiary in clearing any loan that the policy holder has to repay. While calculating the amount, one should factor in inflation.
For how many years should a term insurance policy be taken? Is it necessary to continue the cover post-retirement too?
A term insurance policy is ideally required till one has disposed of all the financial obligations. It is also required till the time one has dependants. It is not required post-retirement if these criteria are met. However, it is advisable to opt for a term insurance early in life to receive the cost benefit.
Are medical tests mandatory? In case it is optional, does it affect the claim or the premium rates in any way?
Medical tests help the insurer assess the proposal of insurance. In case of higher risk individuals, we propose a counter-offer with minor increase in the premium to help us cover the medical risk. This is decided by the reinsurer.
Medical tests are not mandatory.
It doesn’t impact the claim process if the policy holder is truthful and responds to all the questions in the declaration form correctly. However, in case of false declaration made by the policy holder, the nominee might undergo a cumbersome claims process due to investigations.
Should investors ‘step up’ or ‘step down’ the sum assured over the years or should the amount be the same through the policy tenure?
The increase or decrease in sum assured would depend on the person’s lifestyle. If one is likely to have an increased financial liability in the future, it is important to step-up the sum assured and vice versa.
How important are riders? Is it necessary to take them, given the increase in premium that would entail?
Riders provide additional protection to the term insurance plan. Most of the riders offered today suit the need of the policy holder. With a marginal increase in the premium rate, it would be ideal to opt for riders.
Are there any advantages in buying a policy online vis-à-vis offline? Do insurers offer differential treatment for either of them?
There are advantages in buying a policy online. This gives the customer an added cost benefit.
For an insurer, an online customer and an offline customer are the same and apart from the cost benefit, they are treated equally.
By how much do the premium rates change over the tenure of the policy for the same sum assured?
Premium rates remain unchanged over the tenure of the policy.
For those with no liabilities such as home loan EMIs, or other financial commitments, is term cover necessary?
We should look at a term policy as an income replacement/lifestyle preservation policy.
Even if there are no liabilities there is a lifestyle that needs to be guarded. A term plan does exactly that in case of the death of the life assured.
Also read: The best way to buy term insurance