EBOOK LIFE INSURANCE
EBOOK – LIFE INSURANCE
What is term insurance and why is it better than normal Investment ULIP or traditional plans for life cover?
Term insurance is the basic form of pure Insurance and it provides comprehensive life protection. Term insurance is a type of life insurance policy that provides coverage for a certain period or a specified "term" of years. If the insured dies during the time specified in the policy and the policy are active, or in force, a death benefit will be paid.
ULIP-Unit Liked Insurance Policy is an integrated Product offered by Insurance Companies to Provide Dual advantages of Insurance and Investment. In ULIPs one part of the premium goes towards insurance and the other part is invested in various fund options available money market, bonds, debts, equities, or a hybrid.
· Term insurance plans are the most risk-free way to secure the future of your loved ones in case something happens to you. They are specifically useful if you are looking to do that at low premiums and for a high sum assured. On the other hand, ULIPs offer investment opportunities along with life cover. Unlike term insurance, you can enjoy a maturity benefit and fulfill long-term goals, thanks to the returns on investment.
· Both policies serve different purposes, and therefore, you should not pick one over the other.
Methods of Calculation
· Human Life Value: This method focuses on a person's economic value or Human Life Value to their family. The monetary value of a person's life is nothing but a present value of the future income that they could expect to earn for their family. Since it is a prospective amount, the inflation rate is also considered while calculating a Human Life Value. So, according to this method, the life insurance coverage of a person should be in proportion to their Human Life Value.
Below are some factors to be considered:
§ Annual income
§ Retirement age
§ Outstanding loans
§ Current savings
§ Current life insurance coverage
· Income Replacement Value: With the demise of the sole breadwinner, a family may have to go through unexpected financial problems. The Income Replacement Value method focuses on replacing the policyholder's lost income so that their family can continue with the same lifestyle even in the absence of the policyholder.
Current annual income X No. of years left for retirement
· Expense Replacement: As the name suggests, the Expense Replacement approach considers a person's day-to-day expenses, outstanding loans, family members' important life milestones like child's education, wedding, the retirement of a spouse, etc.
So, the total of all these possible expenses is the amount your family is going to need in the future. And, if you deduct your existing assets and investments from it, you will get the amount of life insurance coverage you need. However, one should not count the assets that the family would not sell, like the house you live in.
We at Dilzer Consultants Pvt Ltd use the Expense Replacement method to calculate the required Insurance Coverage. This is the best way to determine how much life insurance you should buy is with a needs analysis. A good need analysis will look at immediate, ongoing, and future expenses. Immediate expenses include mortgage and any other outstanding debt, sending children to college.
I am already covered under my employer’s group life insurance. Do I need to buy a separate term life insurance?
The employer-provided life insurance is meant for the overall group. It is based on the cumulative risk of the group and does not take into consideration the individual needs. Employer life insurance policy is not customized to suit one’s individual needs. This is because it is based on designation, cost-to-company, and the role and also may be restricted to benefits payable only during employment of that company and sometimes further restricted to an unforeseen event that happens within the company only.
Dilzer Tip: Hence, it is wise to opt for an individual life insurance policy that can be customized as per the individual’s financial situation, savings, monthly expenses, liabilities, and health status, while the group life insurance policy serves as a backup.
Some things to consider -
Ø Employers may not offer Enough Life Insurance.
Ø Term Life Insurance is not Customized.
Ø Life Insurance Plan is not endorsed to MWPA (Married Women Property Act).
Ø You can lose your cover if your Job Situation changes.
Until what age should one have term insurance cover?
Factors to consider when deciding on the duration of cover should be:
Your financial Commitments: Financial commitments include things like your Mortgage, college expenses, and other big-ticket items that you will pay in the future. Most people want to make sure that their term life insurance is in effect while debts must be paid.
What you can afford: In life insurance, the longer a term life insurance is, the greater the annual premium.
Dilzer Tip: Duration of cover depends on financial commitment and affordability.
What should be the Premium Paying Term option selected:
Premium payment options include limited premium and single premium along with the traditional regular premium option.
· Regular pay – premium payment term is the same as the policy term
· Limited pay – duration for paying premiums is less than life cover duration
· Single pay – one-time lumpsum payment
If you choose longer coverage tenures that promise coverage up to a higher age bracket, regular premium payments would entail expenses even after you retire.
When you are required to pay premiums over a long period, there are chances that you might inadvertently miss a payment after some years. When the premium is unpaid, the policy will lapse.
Limited premium payment plans are term life insurance plans which allow you to pay premiums for a limited tenure while your coverage continues for a longer period.
Limited premium payments tackle the financial burden of paying premiums for longer durations when you choose longer coverage tenure.
You should select the payment option after evaluating the pros and cons of term insurance limited pay vs regular pay. The decision depends on your current financial situation and expected future earnings.
Factors to consider before buying an insurance Plan:
v Claim Ratio: Claim settlement ratio (CSR) is simply the percentage of claims settled by an insurance company against total claims received each year. A high CSR shows that it’s easier to settle claims with the company. A lot of weightage is given to the claim settlement ratio to assess the customer friendliness of life insurers.
v Persistency ratio: An indicator of customer satisfaction. A high Persistency ratio shows trustworthiness. The ratio reflects the insurer’s customer retention record. The higher the persistency ratio the better it is, as it indicates that more policyholders are renewing their policies, implying a higher level of trust.
v Solvency Ratio: The reputation and financial strength of the promoters of the insurance company is very important to understand whether it can manage the policyholder’s fund prudently and whether it would be able to honor its commitment. To understand the financial strength of the insurer, the solvency margin should be understood. The solvency margin of a company is a measurement of its ability to meet its debt obligations, claims obligations, and other financial commitments.
The higher the solvency margin, the more capable are the insurance companies in settling the claims. As per IRDAI, insurers must maintain a minimum solvency margin of 150%. The solvency margin of each company is published in the annual report of IRDAI, and a comparison can be made on this basis.
v Company History/Reputation: Research the insurance companies
- How long they’ve been in business;
- In which states they sell their products;
- Their mission, vision, and values;
- Company leadership;
- Community involvement;
- Types of products they sell; and
- Financial strength.
v Complaints and reviews: Fewer complaints means the insurer is efficient. it does make sense to look out for the number of complaints or bad reviews a company may have. Although some of it may be fake and generated by competition, a volley of complaints of a similar nature against a company should not be ignored as it is a barometer of customer satisfaction.
Should you add riders to term insurance- Accident and Critical Illness what are they and why should you add them?
Riders are additional benefits that can be bought and added to a basic life insurance policy. They allow you to customize a policy and can provide several kinds of protection if you meet their conditions.
Buying a rider means paying extra, but generally, the additional premium is low because relatively little underwriting is required.
Accidental Death Benefit rider: With an accidental death benefit rider, one can avail additional sum assured in case the insured dies in the misfortunate event of an accident. The additional sum assured is calculated based on the original sum assured and may differ from one company to another. The premium remains fixed for this rider, for the entire policy term. However, some plans may put a cap on the maximum sum assured that can be availed.
Critical Illness Benefit Rider: With a critical illness benefit rider, the insured can receive a lump sum amount on diagnosis of listed critical illnesses as specified in the policy document. Generally, term insurance plans cover you for cancer, stroke, paralysis, kidney failure, heart attack, major organ transplant, amongst others. The policy can either be continued or terminated after diagnosis of a critical illness, as per the terms and conditions stated in the policy.
Advantages of having Add-ons with your term Insurance Plan:
· In the time of need add on’s can be beneficial
· Some add on’s are cheaper than standalone policies
· No Separate documentation/Medical Checkup is needed for add on
· Some riders are not available as stand-alone policies
Adding riders may help you customize your life insurance policy. For those who want to keep risk covers in one place or with a single insurer, such benefits are useful. However, evaluate the need for each specific rider rather than opting for them merely because of low premium. Go with riders if required.
When one chooses pure term cover should one opt for Return of Premium – Why not?
A pure term plan provides sum assured in case of death of the life insured. The sum assured would be payable in case of the death of the life insured during the policy tenure. The Policy does not carry a maturity value, in case the life insured survives the policy term there is no benefit payable under the policy.
In the case of a term plan with a return of premium, if the life insured survives the policy term, the total premium paid is returned to the policyholder. The premium for these plans is higher than a pure term plan insurance plan.
The maturity benefit is the total of the premium paid over the year.
No interest amount is included in the maturity benefit
If the policyholder opts for any rider along with the term plan, the amount that he/she paid for the rider will also be deducted from the maturity amount.
For people who are concerned about return on investment, term insurance with return of premium plans is the most appropriate.
Term plan is a pure life cover and it’s a must-have for every earning member of a family. However, while choosing between a regular term plan and term insurance with a return of premium, it is more about which one provides you a psychological comfort than the benefits.
Who does not need term cover- students, young children through child plans, homemaker not contributing to household income but helping in myriad other ways, people who have no dependents, and Retirees
When is Life Insurance needed :
· To ensure that your immediate family has some financial support in the event of your demise
· To finance your children’s education and other needs
· To have a savings plan for the future so that you have a constant source of income after retirement
· To ensure that you have extra income when your earnings are reduced due to serious illness or accident
· To provide for other financial contingencies and lifestyle requirements
Primarily, anyone who has a family to support and is an income earner; needs Life Insurance. Given the economic value of their contribution to the family, housewives too need life insurance cover. Even children can be considered for life insurance because of their future income potential being at risk.
Term insurance carries no survival benefits, so it’s not a must-buy product for someone with no dependents.
How are insurance maturity proceeds paid - lump-sum and staggered and which one is cheaper on premium rates?
When you buy a term insurance plan, it comes with an option of receiving the total sum assured also know as death benefit either as a lump sum or in the form of a staggered payout
In case of the sudden death of the policyholder within the policy term, the dependents of the deceased get the entire sum assured as a lump sum payout. On the other hand, there is a staggered payout option.
Lumpsum Payout Option: the policyholder pays a yearly premium for a fixed period, mostly 20 to 30 years, against a total sum assured. In case the policyholder dies, the insurer pays a lump sum amount, equal to the sum assured, to the beneficiary of the policyholder. However, if the policyholder survives the term period, nothing is paid to the family of the policyholder.
Staggered Payout: The option to go for staggered payouts allows term insurance plan holders to choose how much money their nominated family member would get and at what point. In some instances, they will be allowed a certain percentage of the full amount initially, followed by small amounts of money paid as monthly installments paid to them over the next two decades or so.
All you need to do is analyze your family’s needs and requirements, and choose the most appropriate option for you. It is suggested that where ever liabilities are required to be paid off, it is advisable to go with the lump sum payout. However, if you A term plan is no doubt a must-have for any breadwinner of the family, and both these pay-out options have their own set of benefits. Wish to get your regular income ensured, staggered pay-out plan fits the bill.
Does choosing an annual pay or semi-annual or monthly pay affect the premium outgo?
Premiums can be paid annually, semi-annually, quarterly, or monthly (i.e., one, two, four, or twelve times per year).
For most people, monthly payments are best since they are easier to factor into your budget, and semi-annual or quarterly payments require larger payments without the benefit of a discount. If you can afford to pay a lump sum upfront each year, paying annually can be cost-effective since many insurers offer discounts on annual premium payments.
Dilzer Consultants Pvt Ltd
Sources: IRDA, Cover Fox, Financial Express, Personal FN, Economic times and Live Mint, ICICI Pru Life.