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A paltry price for protection

A paltry price for protection

The low cost of term insurance allows customers to buy adequate life cover. Here are a few things to keep in mind when you go shopping for one.

How much would you spend for peace of mind? The kind of assurance that comes from knowing that even if something happened to you, your loved ones will not face any financial difficulty.

If you are around 30 years old and earn about Rs 50,000 a month, you can buy this peace of mind for about Rs 4,250 a year. For less than the price of a soft drink a day, you can be insured for four times your annual income. This is the bare minimum insurance cover that experts recommend.

The implications of this arithmetic is not lost on Gwalior-based Deepak Kumar. The 29-year-old bank executive has no financial dependants right now, but will have one when he marries next year. This is why a term plan figures high on his New Year's shopping list. He already has a Ulip, but the cover offered is so little that you need a magnifying glass to spot it.

"I realise that the Rs 1.5 lakh cover offered by my Ulip is insignificant compared with what I need. I had bought the Ulip to save tax," explains Kumar.

This is the most common reason for buying life insurance. It's about time this mindset changed. In the coming years, Kumar may not get any tax benefit for the Rs 30,000 he shells out every year for an insurance cover of Rs 1.5 lakh.

The new Direct Taxes Code (DTC), which is pending before Parliament and is likely to come into effect from April 2012, may change the rules of the game. Tax deduction will be available only if an insurance plan offers a cover of at least 20 times the annual premium. Not many people share Kumar's eagerness to be on the safe side.

Faridabad-based Shiv Pratap Singh is a software engineer, but he likes skating on thin ice. This 37-yearold sole breadwinner finds it a breeze to service a home loan and a car loan, given his income of Rs 1.5 lakh a month. But ask him how his family (homemaker wife and child) will cope if something happens to him and Singh has no answer.

He has an insurance cover of Rs 9 lakh and outstanding loans worth Rs 7 lakh. This would leave his family with Rs 2 lakh-enough to sustain them for 4-5 months. MONEY TODAY believes Singh needs a cover of at least Rs 60 lakh (see box) to ensure that his family's current lifestyle is maintained and future expenses are taken care of in case of his untimely demise.

Take the case of Ghaziabadbased Mayank Sharma (see box). Two years ago, we analysed his financial portfolio and told him he did not have adequate life cover. Since then, Sharma has bought three term plans that combinedly cover him for Rs 45 lakh. The cost: Rs 20,000 a year. That's equal to the premium he pays for a Ulip and a money-back policy, but which cover him for a piffling Rs 2.5 lakh.

"I bought the Ulip and moneyback policies when I did not understand insurance," says Sharma. Now, he swears by the cost-effectiveness of term plans. Sharma pays just 1.33% of his annual income to get a cover worth three years of income.

We agree that these low-cost covers are the best way to insure yourself. However, here are a few basic things to keep in mind before buying a term insurance plan.

Take Adequate Cover

One of the first things you should know is the amount of cover you need.

This can differ from person to person. As we have mentioned earlier, financial planners suggest a minimum cover of four times an individual's annual income. This is a rudimentary approach which assumes that all individuals have the same financial circumstances.

For instance, a 25-year-old unmarried professional earning Rs 12 lakh a year may not need a Rs 48 lakh cover so early in life. However, a 40-year-old salesman, who has two children, a homemaker wife and earns Rs 5 lakh a year, may need more insurance than Rs 20 lakh. Simply put, the insurance cover should be large enough to replace the income of the deceased.

Cover your loans too

At 25 years

The weekly bill for a Rs 50 lakh cover for 35 years is Rs 105, less than what one spends at a movie show.
The insurance cover must also take into account any big ticket loans taken by the insured person.

If someone has taken a loan of Rs 40-50 lakh to buy a house and die suddenly, his family would be saddled with a huge liability.

Lenders may also insist on foreclosing the loan if they think that the family of the deceased will not be able to service the loan. Therefore, home finance companies nudge borrowers to take loan cover term plans.

In these plans, the insurance cover is linked to the outstanding loan and comes down progressively as the loan gets repaid.

Choose the Maximum Term

The term of the insurance plan is crucial. Go for the maximum term offered by the plan. This is usually 30-35 years, but depends on your age. Most insurers don't offer insurance beyond 65 years. If you have cut a cake with 45 candles this year, the maximum term available to you will be 20 years.

However, some plans, such as the iProtect online term plan from ICICI Prudential Life Insurance, offer to cover you till you are 75 years old. However, some may not find it useful to pay for an insurance cover well after they have stopped earning.

Remember, the objective is to replace the insured person's income, not gain from his death. So there is little utility of taking insurance when you are not earning any longer.

Income: Rs 1.5 Lakh a month
Financial Dependants: Homemaker wife and son
Outstanding Loan: Rs 7 Lakh
Insurance Cover: Rs 9 Lakh
Our Assessment: Singh is grossly underinsured. If something untoward happens, his family will be left with just Rs 2 lakh after settling the outstanding loans. This would be sufficient for only 3-4 months.
Insurance Cover Required: Given his income and financial position, Singh should have an insurance cover of at least Rs 60-70 lakh.
Cost: A cover of Rs 60 lakh for 33 years will cost him Rs 16,000 a year. For Rs 25,000 a year, he can get a cover of Rs 1 crore.
The premium for the life insurance cover he needs works out to less than 1% of his annual income.

Take Inflation into Account

A term plan for Rs 30 lakh may seem adequate right now, but with inflation creeping up steadily, pushing up the cost of living, it may not remain so. In five years, even a nominal inflation of 6% will reduce the value of Rs 30 lakh to Rs 22 lakh. In 10 years, it will be worth only Rs 16 lakh.

Besides, when you have a child and an extra dependant, your responsibilities will take a quantum jump as more expenses are lined up. You could buy a fresh term plan to cover every stage of your life. This can, however, be more expensive because the premium goes up as you grow older. And if you have developed a medical problem, you may even be denied an insurance policy.

A better option would be to take a plan that automatically increases the life cover. There are term plans in which the insurance cover increases with time. Under the Life Shield plan from SBI Life, the cover increases by 5% every year or by 50% every five years. So, if you buy an insurance cover of Rs 10 lakh in 2010, it would grow to Rs 25 lakh by 2025, increasing by Rs 5 lakh every five years.

Go Window Shopping

At 30 years
The daily cost of a Rs 50 lakh cover for 30 years is Rs 18, less than the price of a can of soft drink.

At 35 years
The monthly premium of a Rs 50 lakh cover for 25 years is Rs 650, equal to the price of two large pizzas.
Competition is always good for the consumer. See how it has impacted the telecom tariffs in the past 2-3 years. Now it's the insurance market. Detariffing has triggered a price war, with new players offering lower rates in a bid to attract customers.

Also, term plan premiums have come down because many private insurance companies are no longer relying on the LIC data for mortality risks. Advances in medical science and improved access to healthcare mean that Indians are now living longer.

Life expectancy has gone up from 58.5 years in the previous decade to over 66 years now, which reduces the risk borne by insurance companies. This also explains the huge difference in the premium charged by various insurers.

With all insurance companies offering online premium calculators, it is not difficult to find the cheapest plan for your age and financial profile.

Don't Expect Returns

You don't get anything back when you insure your house, vehicle or any other valuable. Yet, most people are bothered about returns when they buy life insurance. "The typical mindset is, 'how much will I get back from this policy?'," says Amitabh Chaudhry, managing director and CEO, HDFC Life. This is one of the reasons why term plans are not popular.

Some insurance companies have restructured term plans, wherein the entire premium paid is returned to the policyholder after the term ends. It's not a good idea because you pay a higher premium than a basic plan and only get the principal premium back without any interest. Instead, it's better to go for a plain term cover without the frills.

Income: Rs 1.25 lakh a month
Financial Dependants: Homemaker wife and child
Outstanding Loan: A home loan of Rs 15 lakh
Insurance Cover: A Ulip, a money-back plan and three term insurance policies that combinedly cover him for Rs 47.5 lakh
Our Assessment: The three term plans cost him Rs 20,000 a year. He should consider switching to a cheaper online plan.
Insurance Cover Required: The outstanding home loan has pushed up his insurance needs. He needs a cover of at least Rs 60 lakh.
Cost: A cover of Rs 60 lakh for 26 years will cost him Rs 9,500 a year. This is less than half of what he is paying right now.
"I am covered for up to three times my annual income for the rest of my working life."

Log on for Bargains

At 40 years
The daily cost of a Rs 50 lakh cover for 20 years is Rs 28, just a little more than the price of 500 ml of petrol.
When Aegon Religare Life Insurance Company launched the first online term plan in November 2009, few had imagined that it would become a roaring success.

The company has sold more than 10,000 iTerm policies since then. This has opened the floodgates for such offerings by other insurance companies.

In the past few months, at least five other insurance companies have come out with online term plans. The obvious draw of the online insurance plans is that they are cheaper than those bought through agents.

Read our cover story to know whether you will gain if you switch from your existing plan to a new, online version.

Income: Rs 1.25 lakh a month
Financial Dependants: Two (Parents)
Outstanding Loan: Rs 4 lakh
Insurance Cover: Rs 24 lakh
Our Assessment: Mehrotra's wife is working, but his parents also depend on him. So, even a Rs 24 lakh cover may prove to be inadequate. He should also consider switching to an online term plan, which may be cheaper.
Insurance Cover Required: He should take an additional life insurance cover of Rs 25 lakh.
Cost: A cover of Rs 25 lakh for 25 years will cost him Rs 4,950 a year.
Even if his spouse works, other commitments require him to take a bigger life cover.