Most of the people do not evaluated their life insurance need before buying their life insurance plan and end up buying a wrong product which may not be adequate to protect their family in case of unfortunate event. Life insurance products are mostly bought to save tax and that is not correct way for taking any financial decision. One must calculate the exact life insurance need before closing on the amount of insurance needed and the plan to be purchased. It is always advisable to take term plan so as to cover you till you reach your retirement. Once you stop earning, there is no need of life insurance cover. You should also find out the claim ratios of the insurance cos. before buying term plan. You should also read carefully the exclusions mentioned in the policy document. While finalising individual financial plan we as a financial planner always look first at wealth protection and than go for wealth creation. One should not ignore need of life insurance in today’s life, especially at a time when we have moved from joint family system to nuclear family and have lot of EMIs liabilities running month on month.
There are two most commonly used methods to calculate life insurance need. First one is human life value method and the other is need based method. Human life value is calculated on the basis of income of earning member till his/her retirement age whereas need based is calculated on the basis of day to day family expenses till the life expectancy of the younger of the couple. One should apply need-based theory instead of going for human life value while calculating the exact need of life cover. It is also important that one should buy life insurance only if one has dependent/s who are dependent on his income . If you are single than you do not need life cover for you. Many also buy life insurance policy for their wife even if she is home maker. Even if your spouse is also working than need of life cover will come down to the extent of her income. Any person who is not contributing financially to family does not need any life cover. Similarly people buy policy in the name of their children's, which is also not advisable. The cost of life insurance in built in such insurance products affect the investment return in the longer run. It is always advisable to consult a professional like financial planner to help you understand your insurance needs.
Term insurance is the oldest form of life insurance and is the least expensive plan to purchase the death benefit. Under term insurance you do not get anything back if nothing happens to the person insured like your mediclaim or car insurance cover. If anything unfortunate happens to the person insured during the term of the insurance cover , the nominee is paid full sum assured. Otherwise there is no maturity value of the plan. Term Insurance provides coverage for specific terms say 10,15,20, 25 & 30 years. Term plans also continues till 75 years of age of life insured but that also differs from Co. to Co. Term insurance is the simplest type of life insurance and the easiest to understand. You do not have to calculate the charges and returns in this plan, as you know from the day one that premium paid by you is an expenditure and nothing is receivable back. Term plans are also available with return of premium in which case you get back all premium paid if you survive till the end of the term. Premium for such plan is higher and one should ignore this. Single premium term plan is also not a good idea to buy.
Now Private players have gone one step further and are now offering online term plans. The major difference between regular term plans offered through agency channel and online plan is that online term plans are available at 40 to 50% discount premium compared to regular term plans. As there is no maturity value in term plans, the effective cost becomes major criteria while finalising insurance plan. Premium of regular term plans include cost of marketing and office expenses. Whereas all these expenses are saved in online term plan, making them cheaper from cost point of view. Agents are also paid 35% of commission in 1st year and 5% from 2nd year onwards in regular term plans. Online term plan has no commission as plan is directly bought from Co. through its web site.
Experts also say that beside cost structure, mortality experience in these plans is also likely to be good as the plan is targeted to the well-educated people, who are net savvy. Mostly the targeted class are well informed and provide true and correct details of their family and health history. This segment also has access to good health facilities due to affordability factor. All these facts leads to conclusion that claim ratio will also be reasonable & therefore online term plans are available at very competitive rate. These online term plans are offered in selected cities at present and one has to check before applying.
Following are indicative premiums for 30 year healthy male, no tobacco user and wants to buy term plan with a sum assured of 50 lacs for 25 years.
Name of the Co.
|
Plan Name
|
Premium
|
Max. Term
|
Max. age of maturity
|
Online Plans:
| ||||
Aviva Life
|
i-life
|
4,501
|
35
|
70
|
Met Life
|
Met protect
|
6,011
|
35
|
70
|
HDFC Life
|
Click2protect
|
6,011
|
30
|
65
|
Aegon Religare
|
i-term
|
6,177
|
25
|
65
|
Kotak Life
|
e-prefereed term
|
6,077
|
30
|
70
|
ICICI Pru Life
|
icare
|
7,500
|
30
|
75
|
Future genrali
|
smartlife
|
8,326
|
30
|
68
|
offline plans
| ||||
Max New York Life
|
Platinum Protect
|
10,368
|
30
|
75
|
LIC
|
Amulya jeevan
|
14,600
|
35
|
70
|
Bajaj Allianz
|
Risk Care
|
12,712
|
40
|
65
|
HDFC Life
|
Term Assurance
|
12,344
|
30
|
65
|
Tata AIG
|
Raksha
|
14,560
|
25
|
60
|
Reliance Life
|
Term Plan
|
16,185
|
30
|
65
|
One should also be aware that provision of Direct Tax Code, 2010 also allows deduction of only Rs. 50,000 for life insurance premium compared to 1 lakh available today, and the same is also clubbed with health insurance & tuition fees paid for 2 children’s. Thus, you are left with very low amount available for deduction for life insurance investment. LIC has also recently announced that it will soon launch online term plan. This will increase the competition in the market and will also force all others market players, who have not introduced online term plans, to launch it soon. This definitely will help the society as a whole as a social security measure.
This article first appeared at myiris.com on 23rd February'2012
