Split your life insurance

Instead of buying one omnibus life insurance policy, it is beneficial to take smaller plans of varying terms. This makes the insurance needs come down, as well as the premium cost.

Narayan Krishnamurthy        Print Edition: February 5, 2009

Insurance companies shout themselves hoarse about fancy variants of policies that, incidentally, cost a fortune. At the other end, financial planners wax eloquent about the need to take pure risk life insurance. These term plans are no-frills, risk-only covers and are the cheapest form of life insurance. Planners recommend these because they take care of an individual's insurance needs at a low price and do not come bundled with investment.

However, the premium rates on term insurance plans go up as the tenure of the policy increases. So, is there a way to reduce the premium outgo without compromising on the extent of the cover? Yes. Just split the level of cover and also the tenures. "By splitting the level of insurance across different tenures, you make sure that your insurance needs come down, as does the premium cost," says B. Srinivsan, a Bengaluru-based financial planner.

Ladder Effect
Splitting your insurance cover into smaller plans of differing maturities reduces costs
Sum assured (Rs)Term (years)Premium/year (Rs)Total (Rs)
1 crore2538,2149,55,350
20 lakh55,12825,640
20 lakh105,12851,280
20 lakh155,62384,345
20 lakh206,4551,29,100
20 lakh257,6431,91,075
Total 29,9774,81,440
Figures are premiums for a 30-year individual on LIC's Anmol Jeevan-1 term life product
• You can balance your insurance needs as they taper off with age. It is easy to reduce the cover by simply terminating one of the policies.
• Splitting helps you save Rs 8,237 annually. The total saving over 25 years is a massive Rs 4.7 lakh.

Experts reckon that as the years in a policy pass by and you age, the need for insurance goes down. Yes, there are circumstances when your insurance needs may go up too, but those are exceptions. "Insurance needs taper off with age because of the savings and asset build-up that takes place over time in most cases," adds Sadagopan. It's similar to what's offered by a liability insurance cover along with a housing loan. In such policies, the insurance cover reduces as you repay the loan. The life cover matches the reduced outstanding loan amount.

While policyholders are beginning to recognise the wisdom of splitting their insurance and investment needs, they are increasingly bewildered by the range of term plans on offer. For instance, many simply compare the premiums of term plans with those of endowment or unit-linked insurance plans (Ulips) for a certain sum assured and come to the conclusion that this is the cheapest form of insurance. Says Mumbai-based financial planner, Suresh Sadagopan: "The cost of life insurance plans varies from insurer to insurer and depends on basic factors such as age, tenure and the sum assured. These determine the premium that you pay."

The first step to buying life insurance is to figure out your need. There are various ways to arrive at the amount of insurance cover you require. Once you've figured this out, take a look at the premiums offered. The premium rates on term insurance plans go up as the tenure of the policy increases. For instance, a 30-year-old would pay Rs 5,128 for a Rs 20-lakh cover (LIC's Anmol Jeevan pure risk cover) for a 10-year term; on the same cover for 20 years, he will pay Rs 6,455. However, the premium on the endowment assurance plan from the same insurer for a 10-year tenure would be Rs 51,138 and go down to Rs 33,265 for a 15-year tenure plan. Term plans charge higher premiums over the long term because of rising mortality costs (or the risk cost on your life) as you grow older.

Here's one way to keep the insurance premium down. Assume you are a 30-year-old who needs Rs 1 crore insurance cover over 25 years. All you need to do (instead of taking a single policy for this amount) is take five policies of Rs 20 lakh each, with varying policy tenures such as 5, 10, 15, 20 and 25 years, or any such combination. One can split this into different tenures depending on the age and requirement. But do remember to keep track of the number of policies that you can manage once they are split.

A single Rs 1 crore policy costs Rs 38,214 annually, adding up to a total premium outgo of Rs 9.5 lakh over 25 years. Assuming that the policyholder's insurance requirement reduces by Rs 20 lakh every five years, he stands to gain if he splits the cover into five different tenures. This way, the premium works out to Rs 29,977 a year, resulting in an annual saving of Rs 8,237. The overall cost benefit works to a staggering Rs 4.7 lakh over 25 years.

There is another advantage in splitting the cover. What if your financial circumstances change in the future and you find yourself over-insured? If you have a single term cover of Rs 1 crore, it may not be possible to reduce the sum assured without terminating the policy and incurring a loss. That's because, as mentioned earlier, term plan premiums go up as the tenure increases. So, one loses if he buys a 25-year plan and terminates it after 10 years. Worse, a fresh life cover would come at a higher cost because of the increase in age.

However, this can be avoided if you have five different policies. You can simply reduce the cover by ending one of the policies. "Such splitting will help you prevent a situation when you may be overinsured," says Srinivasan.

Split your deposits

Of course it makes sense to lock up a large sum in a safe instrument that offers a decent interest rate. The interest rates offered on fixed deposits are generally attractive, especially when it comes to odd tenures. That's why investors see nothing wrong in stashing away Rs 5 lakh in a three-year FD at 10% or more.

The problem is when an investor needs, say, Rs 1 lakh after 15 months or anytime during the tenure of the deposit. The first instinct is to break the FD. But when you break it, you stand to lose. Banks, typically, do not offer you the benefit of the interest rate till the day you break the FD. In fact, most banks don't even let you disband it partially for the amount that you need. A better bet is to split the investment across different values for the same tenure to reduce the impact of loss were you to break an FD.

For instance, you can split Rs 5 lakh into two FDs of Rs 2 lakh each and another of Rs 1 lakh, or in any such combination, to add up to Rs 5 lakh. If they last the entire three-year tenure, the FD will mature to Rs 6.65 lakh - a gain of Rs 1.65 lakh. However, if the same FD is encashed for Rs 1 lakh after 30 months, the interest rate is reduced to the savings rate levels of 3.5%. So your Rs 5 lakh gains only Rs 44,900.

Now, if you had split the investment, you would have checked your loss on a single FD of Rs 1 lakh, instead of losing out on the entire sum. The balance Rs 4 lakh still earns the full interest and will mature at Rs 5.32 lakh, a gain of Rs 1.32 lakh. Meanwhile, the Rs 1 lakh FD over 30 months would have earned Rs 8,981. So, splicing does make sense.

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