The Hindu Business Line : Adding cover to your life

Statistics may well show that most people pay their insurance premium in the last quarter of the financial year. Why? They rush to buy life insurance policies just before the deadline to save on tax. While there is nothing wrong with buying insurance for tax benefits, that must not be the deciding factor. The product you choose should be based on your insurance needs (broadly classified as protection, investment, saving and pension) with the tax benefit just being an add-on. Here's a primer on at some the basic kinds of life insurance options and what they offer.

Insurance for protection

That is what a term insurance offers you. Such a policy offers risk cover to your life within the term period. In the case of death during the policy tenure, the nominee gets the assured sum. However, if the insured were to survive the policy term, the policyholder will not get any returns or benefits. Now, if that sounds like a raw deal, hang on.

Term policy is normally the first step to insuring oneself against uncertainties. It basically offers a high risk cover at a relatively lost cost. For instance, if you were to take a term policy at 25 with a 20-year term and a sum assured of Rs 10 lakh, the premium may be as low as Rs 2,600 per annum. As only the mortality and administrative expenses are covered and there is no savings component, the premium is much lower than, say, an endowment or a money-back plan. An individual looking for investment options can always take a term policy and invest the differential in other investment avenues.

A whole life policy is an extension of the term policy, covering the whole period of your life and paying the sum assured to the nominee on death. However, these policies have over years been modified to pay the sum assured and bonus, if any, on the insurer attaining 80 years or after 40 years of policy term. Some insurers offer this product as a single premium plan.

Investment and saving options

An endowment policy covers risk for a specified period at the end of which the sum assured is paid back to the policyholder, usually with accumulated bonus.

The payment of endowment to the policyholder is the key distinguishing feature of this policy compared to the term policy. An endowment policy is suitable for those looking to get back a lumpsum at the end of a certain period to meet some planned financial goal, in addition to a life cover. Unit-linked endowment policies offer exposure to equity and debt markets and double as an investments.

However, you need to choose unit-linked options (called ULIPs) based on their individual risk profile and financial goals. The money-back plan is a slightly modified form of the endowment plan.

While in a regular endowment plan, the survival benefits are paid only at the end of the policy term, a money-back policy makes partial payments periodically during the term and the rest on the expiry of the policy. For instance, in a money-back policy of 25 years, 20 per cent may be paid every five years with the bonus paid in the 25th year.

An important feature of such policies is that in the event of death before the policy expires, the full sum assured can be claimed without any deduction of the instalment amounts already paid by the insurance company.

Endowment and money-back policies are more expensive than term policies. A basic 20-year endowment policy with a sum assured of Rs 5 lakh may have a premium of Rs 20,000-25000 per annum, I you are in the 20-30 year age bracket. The age of retirement and income required in future would be the determining factors to choose the policy tenure and scheme.

Pension plans can also be unit-linked, providing exposure to the equity market.

So how do you choose the right policy? Investors would do well to keep in mind the following:

Those at the start of their career would do well to have a plain-vanilla life cover, which is affordable and provides basic protection to your family.

The earlier you start, the better, as the premium rises sharply with age.

Understand the various riders that may be left unexplained by your agent.

If you are going for a policy that also acts as an investment, then determine your financial goals and see if the product can deliver your objective.

Keep track of the investment strategy adopted by unit-linked products.

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