Buying insurance for protection and wealth creation has always been a very complicated task involving careful analyzes. The analysis involves the amount of coverage, reason for coverage and the term/time that the cover is required. Term policies taken for a specified period of time like 5, 10, 15, 20, or even 30 years helps to look after family’s financial commitments like education and marriage of our children and the day to day expenses for a reasonable standard of living.
Term insurance policies that resemble motor/house insurance are not subject to the law of indemnity as damage due to human life cannot be measured. Taken for a specified period when financial obligations have to be met, no money is generally paid back if death does not occur in the period.
A bird’s eye view of term insurance policies would tell you:
· Term policies are cheaper as they cover only the risk of death happening within a specified period. In addition the premium charged depending on the age of the person insured and time of coverage required with medical examination being compulsory in most of the cases.
· With very competitive premium rates being the present scenario of the insurance sector, it is found that most companies encourage insurers to take a much higher coverage for extended period of time even up to 35 years or 65 years of age. This accounts for popularity of these policies for people with long term financial commitments.
· Term life policies can be bought very easily either online or through life advisors that market and service these policies. You would benefit buying term insurance policies online as this does away with the expenses of agents/life advisors commission. This accounts for discount in premium.
· In addition a check of the insurer’s 'claim settlement' ratio or the percentage of claims settled by the insurer of the total received would help, with this available on the IRDA website.
· Once death occurs and claim is to be settled this is done in a lump-sum to the nominees or beneficiaries. This depends on the terms of the policy that the insured has taken, with the settlement free of tax payments.
· Term plans suit young earning members with dependents, with the low premium allowing them with additional funds to invest in lucrative equity-linked savings schemes that provide tax breaks
Deciding different factors about term life insurance:
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Term insurance serves as the best life cover for large amounts and extended terms to meet your family’s financial commitments if you are not there. Insurance experts suggest about 12 times your annual income added to your total liability less investment in various assets.
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It is important to note that liabilities include loans taken for house/ personal/ vehicles/and other obligations.
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You should also consider amounts required for the education and marriage of your children, healthcare needs for your spouse and dependents and other amounts that would be required to maintain a reasonable lifestyle.
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Term life insurance policies are mainly meant for earning members of the family, whose financial commitments have to be meant on his/her death. It is however not meant for the young, unmarried working people that have no dependents or financial commitments.
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Term plans are best taken for amounts that consider not only the present financial needs, but also inflation, increase in salaries and lifestyle needs. The premium could rise with age and with increase in the amount of insurance taken and with riders/ additional benefits like personal accident insurance and critical illness coverage.
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Insurance contracts being contracts of utmost good faith require revealing of material facts that would influence its acceptance. This could include your existing health conditions, family history and details of other insurance contracts that have been rejected in past. Undergoing a medical examination if necessary may help reduce chances of claims being rejected in future.
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Term policies are best taken in blocks and increased or decreased according to need. Reviewing insurance needs every 3 to 5 years is ideal to adjust insurance needs. Taking insurance in blocks provides for flexibility to discontinue some in case of decreased financial obligations with time.
Finally take care to ensure that you have read and understood all the information to the best of your knowledge and disclosed the correct material facts like age, income and present health status. In addition carefully go through the signed proposal form and policy document and inform the insurance company in case of discrepancies within 15 days of issue of policy.
The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in
