TERM INSURANCE

First step in financial planning is to take an adequate Term Insurance (is non-money back) from policybazaar.com etc. to provide financial support to the family in the event of earning member’s unfortunate death. It covers the working term of an individual. Sum Assured/Cover should be 10-15/20 times of your annual income depending on your family’s requirement/lifestyle, factor in inflation- the sum assured should also cover all outstanding loans. A term plan does not provide maturity/survival benefit if you live through the policy duration. 

Additional covers in the form of riders like accidental disability/critical illness/loss of employment/waiver of premium should also be taken by paying a small additional amount. These riders add considerable value to the basic term plan purchased like the i) Accidental rider also provides a lump sum in case of partial or total disability due to an accident and the sum assured doubles if the insured dies due to an accident ii) The critical-illness rider pays the insured a predefined lump-sum amount on the diagnosis of certain dreadful diseases like cancer, organ failure etc. iii) By signing of for waiver of premium rider, you don’t need to pay future premiums in case of an accident or disability. Most policies include it these days. If not, do check to eliminate any stress during challenging times. So, riders can be very useful in such circumstances to make up for the loss of income.

In 2018, for my son (26 years), a HDFC Life Term Plan of Rs 1.5 crore (Annual Premium Rs 11,742) + Rs 1 crore Accidental Disability Rider (Annual Premium Rs 2606) + Rs 10 lac Critical Illness Rider (Annual Premium Rs 2215) + Taxes, cost a total of Rs 19,500/- a year. Some Indian insurers are HDFC Life/ICICI Prudential Life/SBI Life Term Insurance etc. Check Claim Settlement Ratio (CSR) of the company, higher the CSR better it is. HDFC Life had CSR of 99.07% in 2019-20. Give full medical details of yourself to avoid claim problems.

Endowment Plans/Money Back Insurance policies have very high premiums (their maturity sum/benefits grow slower than national inflation rate, even post-office returns are higher) and give very low cover which defeats the very purpose of providing sufficient financial support to the family. The aim is not returns but maximum possible cover e.g., you pay Rs 50,000/- premium for 10 lac cover in normal moneyback plans. In place you can buy one term insurance plan with a cover of Rs 1 crore for Rs 10,000–15,000 and invest the saved premium amount in Indian/International Index Funds given under Equity Funds to get higher returns.

Note there are a few term plans that promise to return the premium amount at the end of the policy. However, such plans are usually expensive and should be avoided.

Points to consider while buying Term Insurance Plan:

i) Always buy annual premium payment plan. Avoid onetime payment/single plan policy of like Rs 10/20 lac, advisors will induce you to take such plan as they get 18-20% commission in first year, from second year they get only 5-6% commission even in online portals. Also avoid daily/monthly premium payment plans as if you miss few/2-3 premiums policy may terminate.

ii) Fully disclose your life choices, tell if you are a smoker or alcoholic as some premium amount will increase due to risk factor, otherwise claim will be rejected. Don’t hide your health information or family history/family related health issue. Keep the insurer updated if there are any changes.

iii) Fill MWP (Married Women Protection) Act form. Purchasing an insurance policy under the MWP Act protects the family from the burden of debts and family disputes. Third party cannot make any claim. It was created to protect the properties owned by women from in-laws, relatives, and creditors (banks/financial institutions). Insurance advisor will not tell as this increases his work.

iv) As per IRDA norms, disclose all old/existing insurance policies (ULIP/Endowment/LIC Plan) even done by relatives where you get term insurance coverage; in that case premium amount is adjusted and you get additional insurance coverage.

v) Go with big company/brand like HDFC Life/ICICI Prudential Life/ SBI Life Term Insurance, see CSR/review on google.

vi) Add nominee in the plan and inform your family about the Term Insurance Plan taken.