Life Insurance: What it is exactly?

Term cover or life cover, that replaces your income in the event of demise; to help protect your dependents. Read along to understand what factors to keep in mind when buying a term cover.

Life Insurance is basically a Death Insurance and better term is Income Replacement Insurance. It is a transfer of risk of your death, in terms of financial liability, from you to the insurance company. Like a car insurance, if something happens to the car, the insurance company will pay for the repairing work / or pay an amount according to the value assigned in case it gets stolen. Similarly, a life insurance is a contract between you and the insurance company, in which the company takes money (=premium) to ensure that it will provide money (=life cover value) in case of death of the insured person (like Stolen car analogy).

To re-emphasize, by buying a life insurance policy, you have transferred the risk of your death (by disease, accident, etc) to the company.

Principles:

The Life insurance Cover should be the sum of

• All liabilities (loans – personal, home loan, relatives, etc)

• The amount which provides income required to maintain the current lifestyle.

• Should be able to provide for future liabilities like child education, home, marriage.

• It is better to be over-insured rather than under-insured. A reasonable amount is 10-15 times the annual income. This rule translates into a corpus amount, which invested properly will provide (1/15 to 1/10=) 6.7% to 10% of return and that amount is sufficient to provide the family a decent amount of income, which can then be used for daily expenses and rest for investing, etc.

• Only term insurance will be able to give you the above cover at a reasonable valuation. And like when we go with car insurance, we try to find a good deal, similarly presently, the online term insurance policies provide the maximum bang for buck.

• One or Two term policies. You need to remember that the insurance will be required to be encashed by your family after your death, so someone from the immediate family or close relative / friend should know the procedure of getting it. Online plans are available in most large cities and provided by most non-LIC insurance companies (LIC and most Private now).

• Non-term insurance plans. These are basically insurance plans in which besides the premium amount for life insurance (so this expense is there in these too and does not get removed at all), the extra money is put into various investment options.

• In endowment policies (most LIC policies are these), the extra amount is kept by LIC/non-LIC company in a non-transparent manner and “invested” by them and later after very many years, they provide the cover value + bonuses (which are not guaranteed in amount).

• In ULIPs (unit linked insurance policies), there is a reasonable amount of transparency in terms of what are the various expenses and how they are distributed in various heads Plus in most of the policies, you can even decide the type of investment options. In general, these are much better than the opaque policies.

• Return of Premium Term Insurance- This is cheaper type of moneyback policy, in which beyond the basic life insurance cover, an extra amount is taken by the company to generate a corpus which will equal the total mortality charge over the time period of the insurance policy. These are invariably costlier than basic vanilla term insurance.

• Accident / Disability riders. With the detailed analysis of various riders, if you read the terms and conditions, then these riders are not really worth the amount of money spent on them. I will not recommend them in the way they are presently available.

More Consideration about Options

There are 2 major categories now available:

1. Offline

2. Online.

The only major difference between the two is that the offline plans include the agent commission, while the online plan is devoid of that and indirectly you become your agent. Apart from that, the processing of papers initially, the medical tests, the claim process (in case it is needed) are the same for both the offline and online plans. And of course, since you are the self-agent, you have to fill the forms, attach the appropriate documents and send them to the company (basic rule is if you can reddit, you can do that too).

Points related to LIC:

LIC is the biggest company in every which way you see, in terms of number of policies, the total amount of insurance coverage, etc. However, there are 2 major points against it:

1. Even though it was established in 1956, it did not start Plan vanilla term insurance till early 2000s, and only after HDFC Standard introduced it (I do not have the reference for that right now).

2. Although, there were rumors about it getting an online variety, but few reports show that LIC has completely dropped the idea and Offline term plans (Anmol Jeevan for 25L) are available only. EDIT: They have an online term policy now (although, the premium is on a higher side as compared to other online policies).

Important points for filling of any insurance policy-

1. Give accurate information about whatever is being asked. This is the single most important thing to follow. The emphasis is on 'BEING ASKED', and that also means you do not need to go out of your way to provide information which has not been asked. If you have any doubt, call the customer care and get more information. You have so many options, that even if you reject 1 or 2 based on bad or confusing customer care, you still will be able to get another one with decent service. If the website is bad, customer care is bad, you need not proceed with the company at all. After all, if it is bad now, it cannot be good later on, if your family really need to file a claim process.

2. Ask how the claim process is done. Most companies will show the claim process in some way on their website. Check it out. Usually, it is by providing death certificate and filling up of the claim form, which then has to be submitted to the insurance company's branch office (the agent may or may not help in this, so do not count solely on this. Who knows where will be the agent after 15 years.)

3. Medical Test. This is done to refine the analysis of the risk taken by the company. If you adopt a cynical attitude, you will think that the medical test is unnecessary and just a way for the company to increase the premium (yes, there have been instances in which companies have done that in the name of increased nicotine levels or borderline hypertension or borderline high blood sugar or similar, but in most cases they will just ask for an increased premium and not rejecting it). If the company has increased the premium, then it is all the more good because if a claim is filed, then the company cannot say that this was not disclosed or that was not disclosed, etc. In short, if the company does not ask for a medical test, no problem. If it ask for a medical test, and does not increase the premium – good again. And if it increases the premium- still good. If it rejects because of the medical test, then its a problem and you will need to find out why that is so (also, this may be asked in later policies).

4. The 15-day return option. One can return any policy (any means any policy approved by IRDA) within 15 days of RECEIVING it (not STARTING it). The day you receive it is zero day for returning, while the insurance cover starts a little earlier (when the company has generated the policy after medical tests, etc). If you are not happy with the way the company has handled the policy or their customer care or any thing, which you think can be an issue later on, you can return the policy and get back your money. The amount spent on medical tests is deducted with some nominal amount on paper work, while rest is given back. A small negative will be if you ask for another insurance policy to this or another company and they ask you about any previous policy, then you will be better off telling them about this episode (but only if they explicitly ask for it).

5. The Company has after assessing the Risk and Medical checkup asked for Loading. Should I take it now or leave it? Of course, you should TAKE it. This means they have assessed you properly and with the proper re-assessment want to take that chance with your life. That only makes it a better policy for your family, since it is more likely that they do not consider that you are a horrible risk to them. In reality, you also want that assurance, indirectly. Secondly, if you will not go ahead with the Loaded amount, the company will reject it. And any such rejection will work against you when you will want to have another life insurance policy.

6. Claim Settlement Ratio. This is much shown ratio comparing different companies, their settlement and payment ratios. It is a complex ratio which does not differentiate between pure term insurance (offline or online) or endowment and ulips and just clumps all of them into a single ratio. If you will see the number of policies and the total amount of settlement done, you can arrive at an average amount of cover per policy. The lower this amount, the higher will be the percentage of non-term insurance policies.

The reasons for claim rejection are:

1. Wrong medical or any other relevant (or non-relevant) data provided by the policy holder, whether online (on his own) or offline (either self or agent filled in wrong information).

2. Wrong doing by the company. In this case, the insurance ombudsman is the way. However, the policy claim process is stuck. This also includes ways by which the process can be stalled or is deemed complicated because of logistical reasons. Eg, the recent floods in uttarakhan causing large number of deaths. It is difficult for the company to verify if the person is dead, or missing or some kind of fraudulent behavior on the part of the policyholder.

Just remember, no company has a 100% claim settlement ratio. Ask the customer care or the agent about it and think about their answer.

Companies and Options:

1. If you want to have LIC and LIC only (because it is govt-backed, or its claim settlement ratio is highest, or xyz, then the offline plan is the only option. For private companies, ICICI, Kotak, HDFC, SBI Life are decent. There is an approximate halving of the premium between comparable offline policies between LIC and others. So, decide upon it.

2. For Online options, Religare, Aviva, ICICI, HDFC, Kotak – all are game. Short informaiton about Aegon Religare- it was the first company to introduce online term insurance facility. With time, they put in some more refinements (and also because of competition), they decreased the premium. And added additional coverage to already existing customers (I have never come across any such thing from any other company) when they decreased the premium. LIC online is also available now.

Do check the website of the individual companies, check the premium (recheck whether the premium shown is with or without the service tax) and then go ahead.

TL;DR- go ahead with the easiest company which you find, with a decent amount of cover, and which does not give you (or your family) heartburn regarding settlement of a claim, if it arises.

A Short Note about Financial Structure:

Why does a term insurance levies same amount of premium for the entire term, when it should be lesser in earlier years and more in the later years? I will try to explain in an example.

Eg, for a 5 year term for a 30 year person will charge, say 10000 per year. For the first year, the applicable mortality charge will be 6000, while the rest of the 4000 will be invested by the company into a debt type of instrument. Similarly for the next year, because of increased age, the mortality charge will be 7000, the rest 300 being invested. At year 4, the mortality charge would be 14000, which will be paid partly by the 10000 of the premium, and rest 4000 from the initally invested part-premium monies. This is just an approximation to give you an idea how the insurance company takes into account a same premium for a term insurance.

Some more detail about financial structure.

OTHER TYPES of TERM PLANs:

Return of Premium (ROP) Plans:

These type of plans are sold in a way to show that you get your premiums back. However, these do not come in online options (so much more premium). And, because of the ROP factor, the insurance premium is more than a normal offline plan so as to invest the surplus in a debt instrument and that is given back at the end of the plan.

Additional Disadvantage: If one wants to leave the plan in between, the extra premium amount paid to the company is not given back. The plan makes you stick to it for the complete duration.

Corollary Advantage: For people, who know that without such a loss-potential they will not sustain an insurance plan, can opt for this plan, as this is the least costly endowment plan. And, 'At least, some thing is coming back' mentality is taken care of.

Increasing / Decreasing Term Cover plan:

The main idea in these is that the Sum assured value should be dynamic and related to inflation or amount of responsibilities, etc.

In my opinion, these just create additional complications.

A good way to analyse things is in terms of Total Dependency cover which equals Life Insurance Cover + (Financial Assets – Liabilities).

With age, the (Assets – Liabilities) should increase in a good way, so the Dependency cover automatically increases with time. If the Assets are not increasing, then it is a bigger problem in any case. So, keeping the Insurance Cover constant is not a bad option.