Reader's Corner: Life Insurance

A term life insurance is a straightforward product. The nominee of the insured receives the money on death. Then, why do rates of term life plans vary by such a wide margin? Are there any benefits that one insurance policy provides over the other? If I have to choose a term plan, wouldn’t it makes sense going for the cheapest one?

There are various term life insurance plans available in the market. The premium pricing for each policy depends on several factors like the product offerings, features, claim settlement ratio and claim experience of the insurance company. Thus the premium varies from one policy to another.
 

In terms of benefits, while some products are pure term policies which only offer death benefit, some offer features such as in-built waiver of premium, waiver of premium on total and permanent disability, and so on. The pricing also depends on the premium payout option which can be either lump sum or staggered payout. Duration of the coverage too impacts pricing. The premium for coverage until 75 years, for example, will vary from that of 80 years. 

In your case you should first analyse your and your family’s needs, financial responsibilities and lifestyle before opting for the right plan. Cheaper is always not better. Life insurance is a promise that only holds true at the time of need and when the claim is settled. Therefore, you should look at the insurer’s claim settlement process and ratio before purchasing the policy.

Are there life insurance products where the sum assured increases with age? Are these cheaper than laddering life insurance policies as my age and income increases?

Yes, there are several life insurance policies which offer the option of increasing the sum assured every year, in turn beating inflation. In such life insurance plans, the one-time premium gets fixed and there is no change in the premium while the sum assured keeps increasing by 5 per cent to 10 per cent every year.

It is an extremely wise strategy to go for the increasing premium option considering the increase in age, income and inflation. This is also cheaper than the laddering option. While, it saves you from the hassle of maintaining too many polices, it also saves you the additional cost on increased premium owing to increasing age and/or loading of premium due to other medical conditions which one tends to develop with age.

Is there a different method to calculate surrender value of an endowment plan and a unit-linked insurance plan (Ulip)? I used to take a new policy every year on the advice of my agent until seven-eight years back. I stopped contributing to four out of six policies. Some of them are endowment plan and some are Ulips.

Yes, the calculation method to devise the surrender value of an endowment and a Ulip is different and it also differs on case to case basis.
 

As per the Insurance Regulatory and Development Authority of India guidelines, if the premium paying term for an endowment (traditional) plan is less than 10 years, the surrender value is minimum two third of the yearly premium. If the premium paying term is equal to or more than 10 years, the surrender value is guaranteed and can vary from 30-40 per cent of the total premium, depending on the particular endowment policy.

For Ulips, the current surrender value mandated by the insurance regulator is Rs 6,000, irrespective of the fund value or premium amount. The surrender value can only be recovered post five years of the policy issuance.  However, if your Ulip policy was purchased anytime before 1st September 2010, the surrender value will depend on the specific policy and will vary from 30-40 per cent of the fund value.   

When taking a loan, the non-banking financial company pushed their partner’s life insurance product on me. I have got a good deal and don’t want to let it go. But in the policy offered, they are asking to pay the premiums for the entire tenure at one go. The executive tried to convince me that it would be cheaper. I am in two minds. I may not keep the loan for the entire 20-year tenure. Hence, don’t want to pay for the entire tenure at one go. My question is, can you help me understand the benefits and drawbacks of taking a term plan (for the loan) where the payment is yearly versus one where payment is upfront?

It is true that if you pay the entire premium upfront it stands out to be cheaper than the cumulative yearly premium. However, if you are planning to foreclose the loan in 5-6 years it will be beneficial to go for a yearly premium option, where you wouldn’t need to pay for all the 20 years. Towards this end, you can take a term plan for the insurer of your choice and assign it to the NBFC for your loan. 

Is there a standard format for reporting investment return that Insurance Regulatory and Development Authority of India has mandated? Are the returns shown on the websites and other promotional material net of all charges?

As per the IRDAI regulations, each and every insurance company has to declare their investment return to their policyholders each year. For ULIPs, the company needs to declare their results on the organisation’s website. However, there is no standardised format that has been mandated by the regulator in this regard. 

The writer is MD & CEO – BSLI & Dy. CE – ABFSG. The views expressed are the expert’s own. Send your queries to yourmoney@bsmail.in.