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Life Insurance - Buy term insurance early and for maximum tenure possible

05 Oct 2012

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Irrespective of the city or town, many people are not yet aware of affordable alternative options available in life insurance policies. They may have only heard of the steep premium rates quoted on a life insurance policy and, hence, believe they cannot afford life insurance.

However, an affordable alternative does exist, and that is term insurance. Term insurance is the simplest form of life insurance, where you pay a fixed premium every year and get a life cover for a specified sum assured for a specified period.

A term insurance policy provides a life insurance cover against death. Therefore, these policies are also referred to as pure life covers. It covers the risk to life, and associated risks of loss of income of the insured for their family in case the insured is the wage earner, such as repaying the debts of the insured, funeral costs and college education for dependents. While term insurance is suitable for everyone, it is ideal for those who are looking for a low cost life cover.

It also works well for an individual who has dependents to look after — parents, siblings or spouse. One must consider certain factors while deciding on the amount for which the cover (sum assured) must be taken. In most cases, life insurance is taken only for one purpose: income replacement. There are times when it is difficult to apply the rule of thumb because the amount of life insurance you need depends on factors such as your sources of income, how many dependents you have, your debts, and your lifestyle. If the life cover is inadequate, it defeats the whole purpose of insurance. The general guideline is 12 times of the annual income, minus investment and plus liabilities.

Some factors to keep in mind before buying cover are your age, income needed by your spouse and children in the event of your death, number of years you would like to provide this income to your spouse or children, your spouse’s (if any) and your gross income annually, any outstanding debt, for example, mortgage, loans, credit cards and total amount of your existing life insurance (if any). Also take into account interest rate and inflation rate assumption. It is advisable to take the medical test – it will reduce any chances of claim being denied. Some term insurance policies come with riders. Riders cover risks that are beyond the scope of the main life insurance policy, resulting in a more comprehensive protection. The most common riders cover critical illness and accidental death or permanent disability.

These add-ons step in during situations where the main life insurance policy may not come into play. Buying a rider means paying an extra premium for this supplementary benefit. Normally, this premium is low because relatively little underwriting is required. When a claim for the benefits of a rider is made, it can result in the termination of the rider, while the original policy continues to insure you as usual. Hence, it is recommended to take a rider keeping your present and future insurance needs in mind. It is always advisable to buy a term insurance early in life and for the maximum tenure possible. It can be said that taking a 30 years term insurance once will be very cost efficient than taking a 15–20 years term insurance and extend it later. Buying a term insurance is almost hassle-free except that you might be required to undergo a medical examination to assess your health condition.

Even if medical tests are not mandatory, it is always better to take a medical test before buying the policy because it will iron out the chances of rejection of a claim. The premium rates will also not change, unless you decide to increase the sum assured or add riders to the policy. As with any life insurance policy, the annual premium paid towards a term plan qualifies for tax deduction of up to Rs 1 lakh premium paid (per annum) under section 80C of the Income Tax Act.

(The author is head of product management at IDBI Federal Life Insurance)

Source: FC Research Bureau BACK