Death of the main bread winner of the family can be emotionally and financially traumatic for the dependents. If you have the right life insurance the financial part can be taken care to an extent. Here are 9 things you should think through before you buy the right life insurance.
1 How much life insurance you need?
The first thing is to evaluate how much life insurance you need. There are multiple methods to compute that but roughly speaking the figure varies from 10 to 12 time your annual income plus any liabilities minus any assets (excluding your home). If you have no financial dependent, you need no life insurance. The insurance quantum would also change if your dependent has income of his own. You should ideally compute this figure every year to see if you are adequately covered.
2 Pure Term insurance is the BEST
When you think of life insurance there are term insurance products and insurance-cum-investment like ULIPs (unit linked insurance plans), endowment or whole life policies. Keep away from insurance-cum-investment products.
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You should stick to pure term insurance – which means there is no return if no death. Insurance companies’ also classifies return of premium products as term insurance where the premium paid is partially or fully returned in case of No Death. Stay away from such variations as these are expensive plans and many times their tenure is limited. For e.g. Aegon offers term insurance up to 55 years tenure but return of premium option only for 20 years tenure.
Premium Comparison for 30 Year aged, Non Smoking Healthy Male for 1 crore for 20 years tenure
- Aegon Life iReturn Insurance Plan – Rs 1977/month (return of premium plan)
- Aegon Life iTerm Insurance Plan – Rs 480/month
As you can see the Return of premium plan is almost 4 times expensive which might prevent you to take right life insurance.
3 Online or Offline Insurance?
Almost all life insurance companies offer term plans offline and online. You should buy insurance online from the company’s website only as it’s almost 40% cheaper than the offline counterpart. Offline term plans have agent commission built into it and hence are expensive. While buying online buy through company website only and not through web aggregators or online re-sellers. The other advantage of online plans are lesser chances of error or omission as it’s filled by you. Buy offline only if you are not internet savvy!
4 Single or Regular Premium?
Many insurance companies give upfront discount for single premium payment versus the regular annual payment. We recommend to for regular mode because:
- Single premium ties you up to the insurance plan till maturity. In the last few years the insurance premium has gone down. Had you been tied to a single plan you could not switch to new plans which might be cheaper in future.
- If death occurs right after buying policy, the premium paid is much higher in case of single payment. There is no provision of pro-rated refund.
If you bring in account the time value of money the single premium is not as discounted as you think. Here is a comparison
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Aegon Life iTerm Insurance Plan for 30 Year aged, Non Smoking Healthy Male for 1 crore for 30 years tenure
- Regular Premium – Rs 7,306/year
- Single premium – Rs 1,53,431
If you keep single premium amount of Rs 1.5 lakhs in an Fixed Deposit with interest rate of 7%, you would earn annual interest of Rs 10,750 which is more than the regular annual premium required! So it makes no sense to pay single premium!
5 Lump sum or Installment payout?
Insurance companies are known to innovate and recently they started promoting installment (monthly) payout on death of policyholder. The justification given is it helps family members who may not be financially savvy to handle such large amount at a time can lead to financial disaster. This might be true for financially illiterate but you should not opt for the same if you know the dependent is capable of managing the money. This is mainly because the installment payment plans are comparatively expensive. You might also want to write it down for the family on how to best use the funds.
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6 Avoid Over-insurance
It’s a known fact that insurance premium increases with increase in age so it might seem a good idea to buy higher insurance cover than required. But the increase in premium is offset by the decrease in tenure. Here is an example – if you buy 1 crore insurance at the age of 25 years for 35 years the premium would be Rs 481/month and if you buy same 1 crore insurance at the age of 35 years for 25 years the premium would be Rs 701/month.
- 25 Year, Non Smoking Healthy Male for 1 crore for 35 years – 481 = 481 X 12 X 35 = 2,02,020
- 35 Year, Non Smoking Healthy Male for 1 crore for 25 years – 701 = 701 X 12 X 25 = 2,10,300
As you can see the total outgo does not change much. So you can add insurance as required. Also some insurance companies may deny higher insurance cover.
However you should buy extra insurance if your family does not have a good health history as bad health could make insurance cover expensive or even be denied in extreme cases.
7 Go for Maximum Tenure
Insurance companies are now offering plans with term up to 55 years. This is a good thing for policy holders. Ideally insurance cover maters till retirement but in case you have some liabilities after that the enhanced term can help.
The difference in low vs high tenure premium is not high and so it makes sense to opt for higher term. You can discontinue the policy mid way if you do not need it further.
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Aegon Life iTerm Insurance Plan for 25 Year aged, Non Smoking Healthy Male for 1 crore for following tenure
- 30 years – 453/month
- 35 years – 481/month
- 40 Years – 495/month
- 45 Years – 508/month
- 50 Years – 535/month
- 55 years – 618/month
8 One or Split in Multiple Policies?
If you need large life cover should you opt for one policy or split it into multiple smaller policies? To start with you should opt for one policy as you get significant savings in premium. For e.g. The premium for Aegon Life iTerm Insurance Plan for 30 Year aged, Non Smoking Healthy Male for 30 years tenure is as follows:
- Rs 1 crore insurance – Rs 553/month
- Rs 2 crore insurance – Rs 1016/month
So if you split 2 crore policy in two Rs 1 crore policies the monthly premium would be Rs 1106 (553*2) which is 9% higher than single policy.
However you might need to buy separate policies as your liabilities go up – which can be discontinued as these goals are accomplished.
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The belief that high value insurance has more scrutiny and higher chances of denial is not true. The claim can be rejected if the declaration provided at the time of buying insurance was false. Also every time you buy insurance you need to declare all the earlier insurance with you. So if one policy is denied chances are all would be and vice versa.
9 Riders or No Riders?
The life insurance products comes with a lot of riders like accidental death, critical illness, etc. The question is should you opt for them?
We do not encourage to opt for riders as they are not comprehensive. As in case of Aegon Life iTerm Insurance Plan the critical illness covers only 4 illness. If you check critical illness plan from other general insurance companies the coverage is for 30+ illness – which is more comprehensive.
Also you can buy Personal Accident Insurance from any general insurance company which offers more comprehensive and wider coverage.
The other problem is as the riders are linked to the life insurance, you would loose them if you plan to change your life insurance in future.
Also Read: Understanding NPS Tax Benefit
Some more Pointers:
- You might not get the insurance amount you are looking for as all companies have a cap depending on your annual income. Over-insurance raises red flag for insurance companies as it can lead to fraud.
- With a recent amendment insurers cannot reject claims after three years of policy purchase citing discrepancies in declaration.
- Early death claims (within 3 years of insurance purchase) are subjected to higher scrutiny for veracity from insurer.
- When buying life insurance, the country of present residence and current occupation matter. After you buy life insurance, change of country or location does not have impact on the existing policy.
- Term plan covers include death due to terrorist attacks or natural calamities.
- In case of suicide within 12 months of purchase/revival of policy, depends would not get the insured amount. Most companies would refund the premium received.