Let the first expense you incur this New Year be on insurance. A life insurance policy is a must in the portfolio of every individual. As the family’s breadwinner, you need to secure the lives of your dear ones. Their dreams should not suffer because of financial stress when you are not around. Here’s how to choose a life insurance policy.
Basics
It is better that you buy a life insurance policy in the early stage of your life. The mortality charge which determines the premium is based on the entry age and once the premium is fixed, it remains constant throughout the policy term.
Life insurers issue policy up to maximum of 40 years. So, even if you take a policy at the age of 25, you will have the cover up to 65 years.
However, every five years, take a re-look at your policy. If your income increases, ask your insurer to enhance the sum assured. The sum assured in a life insurance policy is ascertained by the individual’s income.
Generally, as a thumb rule, insurers don’t give cover for more than 20 times the income of an individual. Say, your annual income is ₹5 lakh, you can get a cover of up to ₹1 crore, and not more.
Also, when zeroing in on a life insurance policy, go only for a plain vanilla term cover. BusinessLine always recommends keeping insurance and investment separate. However, if you want combo plans, choose ULIPs (unit-linked insurance plans) rather than the traditional plans (endowment plans, money back plans, guaranteed return plans). The latter invest in government debt securities and pay high commissions to agents; so, though they may guarantee returns to the investor, the internal rate of return (IRR) is not more than 3-6 per cent.
Also, sign up only for a regular premium payment plan. If you go for single premium plans, you will be locked up in them and can’t switch later, says Kapil Mehta, Co-founder, Securenow.in, an insurance broker.
In the last five years, life insurance premium has actually halved, shows data, thanks to improved mortality rates and increased competition.
For the young
If you have just started working and looking for a life insurance policy, the fist step is to compare rates online. Aegon Life i-Term, Future Generali Flexi Online Term, Tata i-Raksha Supreme, and Edelweiss Tokio Total Secure Plus are among the plans that provide the cheapest cover.
However, looking at the claim settlement records, the best insurers are LIC, Max Life, ICICI Prudential, Aegon Life and HDFC Standard Life.
These companies had a claim settlement ratio of 98 to 95 per cent in 2015-16. Choose the insurer who offers you the maximum term.
The longest term offered in life insurance policies is 62 years with maximum age at maturity of 80 years, says Santosh Agarwal, Head of Life Insurance, Policybazaar.
Some plans that offer cover for 62 years term with maturity at 80 years are Edelweiss Tokio Total Secure Plus, IDBI Federal iSurance Flexi Term and Aegon Life iTerm. Others such as Max Life Online Term Plan plus, HDFC Life Click 2 Protect Plus and ICICI Prudential Life iProtect Smart offer cover for 40 years term with maturity age at 75 years.
For a 30-year male, the annual premium for a sum insured of ₹1 crore will work out to ₹8,000-9,500. You can even look at taking an accidental death rider.
The advantage of taking this rider with the base life insurance policy is that you can get a large additional cover for a small increase in premium.
For instance, if you go with HDFC Life, a ₹1-crore base life policy will cost ₹12,281 and if you take a ₹1-crore accidental death benefit rider along with it, you will pay an additional premium of ₹5,743.
On death due to accident the total sum assured paid here will be ₹2 crore.
For smokers
Individuals smoking cigarettes or chewing tobacco or consuming any other form of nicotine get classified as ‘smokers’ by life insurance companies.
The premium on a life insurance policy for smokers is higher by 40-50 per cent across age groups. For instance, for a 40-year male smoker, a life insurance policy for sum assured ₹1 crore will cost about ₹23,000-27,000 a year, whereas for a non-smoker it may be only ₹13,000-14,000. But do disclose your smoking habit, even if it is occasional, when taking a policy.
If you hide it and the insurance company finds it out at the time of claim, there is a possibility that the insurer may reject the claim. Recently, Bajaj Allianz Life launched an online term policy called eTouch online term (shield variant). The premium for a smoker is lower here compared to a few others in the market.
For the 40-plus
At least 20 per cent of the people who buy life insurance today are in the 40-plus age band, says Santosh Agarwal. Your premiums will be little higher than that for a 30-year old, but it’s better you buy a policy rather than leaving your family vulnerable.
Some insurers such as Edelweiss Tokio Life and ICICI Prudential Life offer a comprehensive critical illness cover (provide risk cover for 30-plus illnesses) as a rider with their life policy, do check that out too.
If you are above 60, consider a health policy rather than a life insurance cover.
(The article first appeared in BusinessLine's Portfolio section.)