How financially secure is your family? This question sounds innocuous and a lot of people would answer it in the affirmative. After all, if you are in a well-paying job or a business that is doing well, why would you think otherwise? However, what this question is really driving at is: if, God forbid, the main breadwinner were to meet with an untimely death, would your family still be financially secure? In such a scenario, income would stop but the expenses wouldn’t. Have you prepared for such an eventuality?
The best way to protect dependants against the risk of the breadwinner’s untimely demise is to buy term insurance. This is a pure protection plan that offers no benefit on maturity. Because it has no investment element, it is the most inexpensive form of insurance. It allows the policyholder to purchase a large amount of insurance at a reasonable cost (see premium table). In addition, you are also entitled to benefits under the Income Tax Act, 1961.
Say no to mixed plans
Why are we advocating a pure insurance plan, rather than one that combines protection with investment (say, a unit linked insurance plan or Ulip, a moneyback plan, or an endowment plan offered by insurers)?
Insurance cum investment plans are sold chiefly on the plank of convenience. Pay one premium, the agent tells you, and both your insurance and investment needs get taken care of. However, what he doesn’t tell you is that with these mixed plans often the amount of insurance that you get is grossly inadequate for taking care of your family’s needs in case of an eventuality. Two, many of these insurance-cum-investment plans are also expensive: the charges are high and they affect adversely the returns that you earn from them.
For these reasons, we at Value Research strongly advocate that you avoid mixing insurance with investment. Buy a term insurance plan to meet your insurance needs, and invest in mutual funds to fulfil your investment requirements.
This practice of keeping insurance and investment separate also gives you flexibility. If you invest in a Ulip, the investment portion of the premium that you pay will necessarily get invested in one of the (few) funds offered with the Ulip. On the other hand, if you decide to put your investment corpus in a mutual fund, you get to choose from the hundreds of funds available in the market.
In a Ulip, the lock in period has been raised from three to five years. If the Ulip plan’s fund performs badly, you have no option but to stay put. On the other hand, if you invest your money in a mutual fund and its performance falls below that of the category average for three or four quarters, you can easily exit that fund and invest your money in another.
Buying a term plan
When purchasing a term plan, keep the following points in mind:
Sum assured: A common rule of thumb says that the sum assured should be at least 10 times your annual income. According to Mumbai-based financial planner Vishal Dhawan, “Estimates of outstanding liabilities, inflation-adjusted expenses for your short- and long-term goals, and the amounts needed for emergencies should be taken into consideration when deciding on the sum assured.”
Tenure of policy: Since term insurance policies are for a pre-defined period, it is best to opt for the long term because it is difficult to get another policy at an advanced age. Besides, the premium on a new policy may be very high at that age. According to Pune-based financial planner Veer Sardesai, “Make sure that your term policy lasts at least till all your liabilities are taken care of: loans are repaid and the children’s education and marriage are over.” Hopefully, by the time the term policy ends, you would have accumulated enough money for your retirement corpus to secure your wife’s needs.
Premium: Even when the sum assured and tenure are similar, the premium charged by different insurers could be different, often by a considerable margin. So do a comparison of premiums instead of buying from the first agent that approaches you.
Besides, study the various options available in the market properly. Some insurers charge lower premium rates from non-tobacco users. Rebates for higher sum assured are also offered. Generally, lower the insured’s age, lower is the premium.
The other aspects that you need to take into consideration while buying term insurance are:
Riders: Accidental death and disability, critical illness and waiver of premium are the three common riders that most insurers offer with their term plans. Buyers should evaluate (by looking at both the benefits and the cost) whether to avail of these covers via riders or via standalone policies. Waiver of premium is one rider that should be bought with all term policies. In case of others, you are better off buying a stand-alone policy.
Medical tests: Except when the sum assured is small, the buyer has to undergo medical tests when buying a term cover. As the age and the sum assured rise, and hence the insurer’s risks increase, the tests get more exhaustive. Usually the insurance company bears the cost of these tests. Only if you buy a policy and then cancel it during the free-look period could you be required to pay for the tests.
Internet-based plans: You can purchase term insurance from a company’s branch office, its agents, and increasingly, from its website. Many insurance companies such as Aegon Religare and ICICI Pru nowadays offer Internet-based term plans whose premiums are much lower (than of a term cover bought via an agent or branch office). Since the cost of selling via the Internet is lower, companies pass on some of their savings to their customers.
Besides company websites, third-party websites like ApnaInsurance, InsurancePandit and PolicyBazaar also offer term plans. The good thing about these third-party websites is that they allow you to compare the premiums offered by different insurers in a jiffy.
Income-tax benefits: Term insurance offers income-tax benefits under Section 80C and 80D of the Income Tax Act, 1961. You may avail of deduction up to Rs1 lakh from your taxable income on premium paid. Additional deduction up to Rs15,000 is available on premium paid for (medical/illness-linked) riders. Moreover, the benefits received at death are also exempt from tax under Section 10 (10D). However, the Direct Tax Code proposes to tax the death benefit from term plans.
After purchasing a term policy, remember the following:
Pay your premium on time: If you miss the last date of payment, you will have to pay additional charges provided you have not crossed the grace period. If the latter date has also passed, the policy will lapse and reviving it is even more difficult.
Understand the policy: Make use of the 15-day free-look period to read and fully understand the terms and conditions of the policy. This is your last chance to decide whether the policy fulfils your needs. If it doesn’t, cancel it.
Finally, if protection for your dependants is what you are looking for, buy term insurance. Only with this low-cost insurance policy will you be able to purchase adequate protection for your family.