Insurance, as a financial product concept, never really took off in India. Seen more as an investment product rather than a means of protection, insurance remains a tool for saving tax, linked to targeted corpus building.
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Unfortunately, the protection part remains dimly understood, partly because it is not in the agent’s or bank’s interest to make consumers understand it. Pure insurance products, called term plans, have a smaller premium amount compared with big-ticket investment-bearing premiums, making the commissions smaller.
But smart consumers are asking for term products and are faced with multiple choices. A look at what’s available and who should buy what.
Basic term plan
The simplest and the cheapest, this provides a pure cover. While your nominee gets the sum assured in case you die, you get no returns if you survive the term. If you want your premiums back at the end of the term, you can opt for the return of premium variant, which is more expensive.
However, a few insurers are coming up with variants within the basic structure. For instance, DLF Pramerica Life Insurance Co. Ltd’s Family Income Plan gives you the option of choosing monthly income for your family instead of paying a lump sum. “Here the customer pays the premium according to the monthly benefit he chooses for his family,” says Kapil Mehta, managing director and CEO, DLF Pramerica Life Insurance.
While this works if you die earlier during the policy term, it won’t if you die later. This is because there will be fewer monthly payments left.
Decreasing term plan
Under this policy, the sum assured goes down over the years. So, it is meant for those who expect their insurance needs to go down with time. These plans come cheaper because the cover decreases.
This is, usually, taken to cover liability against a mortgage product, such as a home loan. Along with your decreasing loan liability, the sum assured goes down. The sum assured is equal to the outstanding loan, which decreases every year proportionately.
Says Anil Rego, founder and CEO, Right Horizons, a wealth management firm: “A decreasing term plan makes sense for individuals who accumulate assets over a period of time and their dependence on a term plan decreases. It is a must for those having mortgage products, such as a home loan.”
While decreasing term plans are generally offered along with mortgage products, they also come as stand-alone policies.
Increasing term plan
This one is an exact opposite to a decreasing term cover. Here, the sum assured increases by, typically, 5% every year until your sum assured doubles in value. The premiums are obviously on the higher side.
Adds Rego: “These are very expensive. Unless an individual is sure that his assets will not suffice for his family, he shouldn’t take this. A term plan is needed the most when a person is young and has financial dependants but no assets. As years go by, he accumulates enough assets, and also has fewer dependants.”
You could consider an increasing term plan if you haven’t bought sufficient insurance early on—as you grow older, buying insurance becomes difficult and expensive.
Convertible term plan
A fairly new concept, this blends the benefits of a term plan with a savings plan. You buy a term plan and get the option of converting it into an investment-cum-insurance plan, typically, five years later. So, you cover your insurance needs during, say, your initial years of work and if you think you have saved enough over five years, you switch to a different plan. Your initial sum assured gets transferred to a new policy for which you may be charged a different premium.
Says G.N. Agarwal, chief actuary, Future Generali Life Insurance Co. Ltd: “This product is meant for young individuals who have limited income and huge insurance needs. Over a period of time, they may want to upgrade to a savings plan. At that time, if they set out to buy a new policy, they will have to undergo underwriting processes, such as medical tests. Through convertible policies, they can escape fresh underwriting.”
For instance, if you buy a convertible term plan for a sum assured of Rs50 lakh, you pay a premium of around Rs20,000. Assuming you convert it into a unit-linked insurance plan (Ulip), you will have to pay a premium of Rs2.5 lakh for the same sum assured. We have assumed the sum assured multiple is 20 times the premium.
Says Shekhar Bhandari, head (tied channel business), Kotak Mahindra Life Insurance Co. Ltd: “The advantage is that when you upgrade to a savings policy, you get it cheaper since the customer has already been underwritten.”
But what if you can’t afford to invest Rs2.5 lakh annually after five years? “You have the option of only partially converting your policy,” says Manik Nangia, head (products), Max New York Life Insurance Co. Ltd.
If you don’t want to convert your policy after five years, the policy will continue as a term plan you originally bought. “You don’t get the benefit of converting any more. Insurers have to give a stipulated time period because there are underwriting risks involved,” says Nangia.
A convertible plan does give you the flexibility to upgrade, but remember that they are expensive and not worth it if you don’t convert them.
Graphics by Ahmed Raza Khan/Mint