Term Insurance

I always believe insurance as a tool to safeguard against the risks rather than as an investment vehicle. This is a reason why I have always advised people for a term insurance plan. These days I am in the market scouting for a term insurance plan and hence I decided to share some of my research.

1. Premium: On a 30 year plan, even a small 100/- difference in premium would impact your total premium paid by 3,000/- rupees (1,050/- in present value terms). Hence this is the most important criteria. In ULIP/Endowment/investment cum insurance plan 3 aspects are mixed together. A. Return on Assets, b: Fund management fees and c. insurance premium. Most companies make their policies so confusing that one could not isolate the 3. But luckily a term insurance can allow you to isolate the 3 charges and find the best deal.

2. List of exclusions: Only if you know how you would die, life would be so simple; you could simply avoid that situation all together and live forever. Jokes apart, none of us know when and how we are going to die and we don’t want to leave our spouses and family in financial distress. Here comes the conflict of interest. Most insurance brokers/agents will not highlight what is covered and what is not. What more is that if you ask for a list of policy exclusions they would say that they will get back to you, which they never will. Aviva (i-life), Birla Sun life (protector plan) and Aegon Religare (i-term) insurance companies don’t attach any major exclusion. ICICI (i-protect) has several exclusions hence I would avoid it. The most important exclusions to look for are SARS and other epidemic diseases, terrorist attacks, civil commotion/unrest/war, death on foreign soil. No matter how farfetched your broker tells you these situations are, they are very real. By IRDA law, suicide after first year is covered under all policies. Some exclusion I won’t worry about would be death while engaging in illegal activities, dangerous recreational sports.

3. Riders: Critical illness is a very important rider because a prolonged terminal illness can induce a lot of financial distress for the family. Accident rider is a stupid rider and just a means for the insurance company to mint money. Reason behind is that to get paid under this clause death has to occur due to a very narrow spectrum of causes, violent and sudden. So effectively, unlike prolonged critical illness, the family does not have to inherit a huge unpaid medical expenses bill. Hence making it unnecessary and useless.

4. Inflation protection: Birla protector plan has a unique feature which allows the sum assured to increase year over year at a 5% or a 10% rate. The premium for this plan is higher, but the best part is that a 50,00,000/- sum assured after 30 years of 10% inflation becomes 793,15,465 /-, while the premium is only slightly higher. Considering that as you grow old, your mortality rate goes up, this could be a really cost effective way of getting a huge cover at a small price.

5. Track record of insurance company: Go to IRDA website, in their annual report (2009-10) they have summarized the performance metrics of all the insurance companies. Statement 12 has a table of individual death claims.

6. BEWARE OF FRAUD: Insurance agents are notorious for mis-selling. Hence no matter what always go to the company website and read the fine print. Remember you are entering into a 30 year contract in which you have to pay every year. If you smell something fishy, walk away there are just too many insurance companies ready to take your business.

7. Buy term insurance when you think you need it. Agent would always like you to buy insurance NOW by saying that next year your premium will go up, but it is a lie. NPV of a 30 year plan bought in 2012 is always higher than an NPV of a 29 year plan bought in 2013. (if you don’t believe me download a premium calculator tool from the insurance website and calculate it yourself) BTW over the past 5 years, due to increased competition the insurance premiums for term plan have been only coming down.

8. Your agent would always like to cross sell you some other product, because term insurance is a commodity and since the premium is too low, it does not generate much commission income for him. But don’t be dissuaded. Check online, visit the company’s website. Many companies sell term insurance exclusively online.

9. Ideal cover: Outstanding home/other loans + some money (say 5L) to cover for the outstanding medical bills that you would have incurred during your last days + some money for college education for your kids + living expenses that your family would incur (reduce it by the amount spend on you). Also if your spouse is working you can reduce your insurance substantially because sans house rent, your spouse income (no matter how meager) can cover the living expenses. Also deduct your inheritance and value of assets you own from the insurance cover calculations. Remember the premium might be low, but it does not mean that you have to sacrifice your present to pay for a huge insurance cover that your family would never need. Just make it big enough that your obligations towards family are met.

Remember: a portfolio of a term insurance and a good investment (bond, mutual funds, stocks etc.) will always out perform a insurance cum investment combined product and will not have the restrictions of heavy exit loads, lock in, asset management fee etc.

For a long time I have been debating between Birla Sunlife protector plan (with 10% inflation protection) and aviva’s i-life plan. Finally I have gone ahead and booked Aviva’s i-life plan.
PS: I am not a certified insurance selling agent. So please consult your financial adviser.

 

Home Loan Insurance Vs Term Insurance

For most people, the Home Loan EMI is the single largest monthly expense. With the interest rates getting revised, often the wifes are forced to continue employment just to be able to run the household. Hence Home Loan Insurance is a very good scheme. It allows your family to have a house over their head even after you are gone.

However, I would advise people to go for term insurance rather than go for house loan insurance. Reasons
1) Term insurance cover remains constant for the entire period.. While after each EMI, the housing loan cover reduces. Although the insurance companies claim that they take care of this difference by reducing the premium amount, but if you do the maths and take into account that the insurance premium increases as you age, you will find that the deal is not good enough.

2) Interest Rate fluctuation: Rise of even 0.5% of interest rate would increase the EMI term for additional year, however this insurance does not give you any insurance cover for those EMI. On the other hand if the interest rate falls and the period of the loan gets reduced, the refund from the insurance premium is minuscule. (thanks to their service charges.)

3) Foreclosure: Most of us agree that even though we take a housing loan for 15-20 years, there is always a chance that we will have to foreclose… Reason could be because you have made enough money to pay of the loan dues and save on interest, or because you want to sell the house (move to a different city/bigger place) or you might to switch the loan from one bank to another… In event of foreclosure, the home loan insurance is void.

4) Full fledged term insurance gives you an opportunity to have all the additional extra benefits like disability, critical illness etc… which are not covered in the home insurance.

Hence, although I strongly recommend a person to go for a insurance the moment he takes up a long term financial commitment like housing loan (or marrying and promise to pay the wife’s shopping bills), its best to make it a plain vanilla term insurance rather than an exotic scheme like this. This scheme might look cheaper on the first glance, but due to limited benefits, it only reduces the flexibility.