Taking cover. This Diwali, gift insurance to your family

Instead of buying material things like a new house or a car, this Diwali, why not try and secure the future of your loved ones.

The diya of life may extinguish any time. While you can’t do anything about your physical absence, you can at the least secure the family’s financial future by buying a life insurance policy.

A life insurance cover can make up for the loss of income when you are not there, take care of children’s education, pay outstanding liabilities and give your spouse financial security.

Basics

A term insurance plan is pure-risk cover and has no-frills attached. At the end of the term of the policy, if the policyholder survives, no benefit gets paid. But in case of his unfortunate death during the tenure of the policy, the nominee gets the insurance cover amount also called sum assured (SA).

The premium even for a large SA of say ₹1 crore is very nominal today in a term insurance policy.

For a male of 30 years (assuming he is a non-smoker), the annual premium for an SA of ₹ 1 crore for cover till 70 years of age would be ₹ 9,000-12,000. For a female of the same age, the premium works out to ₹ 7,000-9,000 per annum.

Buy term insurance as early as possible because as you grow older premiums increase (once you buy the policy, the premium remains fixed all through the term). Also, it does become more difficult to get insurance if you develop chronic diseases such as diabetes.

When taking a life insurance policy be sure not to fall for the bundled products which are nothing but savings/investment plans and have a high cost structure. Traditional endowment plans may at best give you 4-5 per cent return (IRR). In ULIPs (unit linked insurance plans), as investment is made in market products, risks are high and returns are not guaranteed. ULIPs may be an investment option for investors with high-risk appetite, but it falls short as insurance.

Further, make up your mind on the following before you set to choose the insurance company – the sum assured, the term of the policy, premium payment period – whether limited term or regular (till end of the policy) and premium payment mode.

There is a thumb rule that can help you decide on the cover amount for life insurance. This is generally 10 times the annual income of the individual. Say suppose you are earning ₹15 lakh a year, you need a life insurance policy of SA of at least ₹ 1.5 crore. But depending on your liabilities and the lifestyle of the family, you can even look for higher SA. To decide on the term of the policy, you need to first think about how long you will have an active work life and will be supporting the family financially. If you think that by 60 years you will retire and you will have no financial liability, you can choose to have a cover till 60 years. This will help reduce premium on the policy. But note that today many insurers including LIC, SBI Life, ICICI Prudential and HDFC Life give cover till 70/75 years or some even till 80 years. If you had a late career start and late marriage and kids and think your financial responsibility will go beyond 60/65 years, you can have an extended term coverage.

The decision on the premium payment term is also important. Insurance companies offer two options – one, limited period premium payment where you pay premium only for 5/7/10 years (while cover is for the whole period you choose), and two – regular premium payment where you pay premium till end of the policy.

In limited premium payment while the premium outgo annually will be higher, you will end up paying lower premium all together for the cover. Take for instance, you are a 30-year-old male (non-smoker) and want a cover till 70 years for ₹ 1 crore. If you pay annual premium of ₹ 10,600 on this policy for the next 40 years, you would have ended up paying a total premium of ₹4.24 lakh. However, if you had opted to pay premium for 10 years in total, your annual premium would be ₹ 23,577 and you have ended up paying a total premium of ₹2.35 lakh – a saving of ₹1.89 lakh. Thus, if you can manage to pay higher premium, go for a limited premium payment term. Also, paying premium annually is a better thing to do, rather than going in for a quarterly/half-yearly option, if you can afford it. When you pay quarterly or half-yearly, total premium that is charged is higher.

How to buy?

Insurance is cheaper when bought online as there is no agent commission involved. Akin to shopping on Amazon, today, buying insurance on respective insurer’s website or on the site of insurance aggregators like policybazaar.com is very simple, it can be done in 10 minutes. If you fill in details of your age and the term you need to be covered and SA you are looking for, it will calculate your premium. If you are okay with it, you can proceed by providing KYC details and filling in the disclaimer form on health. After this, you will proceed to make the premium payment, and in next few minutes, you will have bought the policy.

When selecting a life insurer, pay attention to the claim settlement ratio – this indicates how good the insurer is in settling the claims of the policyholders.

LIC, the insurance behemoth, and Max Life Insurance have the highest claim settlement record of 98 per cent and 98.3 per cent respectively. This means, they settle 98 of every 100 claims they receive. Others such as ICICI Prudential Life (97.9 per cent) and HDFC Life (97.8 per cent) too have a good record.

Secure the life of your spouse

There is a risk of your lenders claiming to be beneficiaries of your insurance policy when there is an outstanding liability. When lenders approach the court to take their dues form the insurance settlement, there are high chances that they may get a verdict in their favour. To avoid a situation like this, register the life insurance policy under the Married Women’s Property (MWP) Act. When you buy a life insurance policy under the MWP Act, the wife and/or children will be the only ones who will have access to the claim amount. However, note that life insurance policies can be brought under the MWP Act only at the time of purchase; it can’t be done later.

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