Swagath, an insurance expert, answers some frequently asked questions relating to life insurance!
Why should I take term insurance in the first place? How does it stand out against other life insurance policies?
Every breadwinner in a family has financial responsibilities. In their absence, a family will struggle to make ends meet, settle liabilities, and provide for large expenses in the future. So, each family needs risk protection that can secure its financial future in case of uncertain situations. Therefore, every earning member in a family must be adequately insured.
There are multiple life insurance policies like endowment/money back/traditional ULIP plans. The only way to look at insurance is as a risk protection tool and not as an investment avenue.
Term insurance certainly stands out for that reason – as it is the simplest and purest form of risk protection. There is no savings involved and it provides adequate risk cover at an affordable premium.
What happens if I survive the policy term?
In a term insurance policy, there is no survival benefit. If you outlive the policy term, the policy will be terminated.
Why should I opt for a term policy whose cover is limited to a certain duration and not a whole life that offers cover until the end?
We purchase life insurance to overcome financial challenges associated with losing a loved one. Every family needs a financial backup plan if they lose a breadwinner. Both, term and whole life insurance prepares us financially in the unfortunate event of the demise of the policyholder.
Term insurance acts as an income replacement tool. Generally, these policies cover financial risk through the insured person’s working life until retirement. The logic behind this is that by the time one retires, there is sufficient savings to provide for dependents, and all liabilities are settled. So, people really need to be insured only through their working life for a fixed number of years.
Whole life insurance policies are inbuilt with a guaranteed settlement. They tend to be significantly more expensive because of this. Since a person’s assets should suffice post-retirement, most families do not need a whole life insurance plan.
Is there an advantage to having both whole life and term life policies?
The term insurance for a whole life provides death benefits and protects the policyholder during their entire life. As we know, the premiums payable on a 99-year cover are significantly higher compared to the 60-year cover. Whole life policies can be more than twice as expensive as term policies. And the payment period is way longer.
Assuming someone lives for more than 90 years then they may receive the whole life policy settlement and not the term life policy. The policy proceeds may not be of a great value considering inflation and time value of money.
So, it is advisable to have a term cover until retirement and build a separate corpus for retirement and wealth creation.
Can I take multiple life policies? Would that affect my claim settlement?
Legally, one can buy multiple life insurance policies. The nominee can also claim entire policy amounts from all insurance policies. But the life insurance policies must be disclosed across insurers.
Is the term insurance coverage worldwide?
Term insurance has worldwide coverage. If a person becomes NRI during the policy period -declaration is required.
What parameters should I consider when choosing a company offering term insurance?
An important distinction when it comes to term and health is that term policies are long-term commitments. With health, one has the option to switch insurers every year. So, one must be thorough when selecting a term insurance provider. Some important parameters to consider are credibility, claim settlement ratio, persistency ratio, and solvency ratio.
Credibility is about knowing how long the insurance company has been in the market and its reputation.
Claim settlement ratio: Percent of claims settled by the insurer against the total claims received in a year. A higher claim settlement ratio shows that there are fewer disputes in the claim settlement process.
Persistency ratio: Ratio of the policyholders that have renewed their policies with the same insurer. This shows that customers are sticking with that insurer for a longer time.
Solvency ratio: This is an indicator of the financial health of the insurance company. The financial situation of the company determines its ability to pay claims.
What is the difference between online and offline term plans?
Premiums are comparatively cheaper for online plans. In an offline term plan, the insurance agent is the point of contact in case of any modifications or claims. In an online plan, the nominee must get in touch with the company directly.
What are the pros and cons of choosing regular/limited payment options?
There are three payment options for a term insurance policy – Regular pay, Limited Pay, and Single Pay. In a regular pay option, the premiums are paid through the policy term, in a limited pay option the premiums are paid for a portion of the policy term, and in a single pay option, the premium is paid once at the start.
The positive side of choosing a regular payment is that it does not put a strain on cash flows. The premium is paid over a period of time. In case of a regular term plan, if the policy is taken for a longer-term, you might have to pay a premium even after you retire. This needs proper planning as there might not be a steady source of active income post-retirement.
In the case of limited pay, there is an advantage of paying a lesser premium on an absolute level. The downside is that premiums are larger for the specified period. For example: Instead of paying for 30 years in a regular pay you choose to pay for a period of 7 years with the limited pay option. In this case, the premium can approximately be 3 times what you need to pay in regular pay.
In a single pay option, you pay a lump sum upfront.
What are the pros and cons of choosing ROP plans?
ROP = Return of Premium
At first, it may seem like a no-brainer to choose an ROP to your insurance policy. After all, it seems to provide the best of both worlds. If someone dies within the term, the loved ones receive the death benefit and if someone survives the policy term they get paid back.
However, one can draw parallels to an endowment or savings insurance plan with this. The premiums are higher when compared to a pure term policy. The benefit at the end is not taxable but it does not appreciate.
If you invested the difference in premiums between a regular and a return of premium plan, you may wind up with more money than the premium amounts.
How would a life insurance company know about my absence? How do I ensure that my spouse gets the insurance proceeds of my life insurance policy?
The nominee must intimate the insurance company about the death of the policyholder.
You can make your spouse or the dependent as the ‘beneficial nominee’. Both nominees and the beneficial nominee have a right to the insurance proceeds. This ensures your spouse gets a right to the proceeds. It is important that details like insurance policies or investments must always be on record and shared with the family members.