Friday, June 5, 2015

A discussion on Term Insurance

This post is a consolidation of a discussion i had with friends online and offline about why term insurance and which one is best.

Why life insurance ?
Am going to be blunt here, if you die suddenly, insurance company would pay an assured sum to help your family recover financially

Why term insurance?
There are endowment, money back, pension and term plans. Endowment plans(others are similar) provide a lump sum but that is 10 times lesser compared to a term insurance for the same payment of premium. But that is at a cost here, term insurance pays your family only if you die, so if you survive the policy term then all the money you paid is gone and you get back nothing. What you get is an assurance of money, a 'big' money, at the cost of loosing it all after the policy term. How much could you loose if you survive? For eg (all approx numbers)., it could be 375000 for a regular yearly payment policy of 25 years for a cover of 1cr and 2 lakhs if you choose the single payment. But when you compare the potential assurance that you get, premium that you could lose is still logical. Term insurance is the real insurance. 

To understand better, let me give you a comparison, I already have an endowment plan (like LIC Jeevan Anand) for a sum assurance of 5L, after 26 years i would get approx 10L inclusive of bonus for which i pay 20k every year, but this 10L after 26 years or any time even before that might not be enough for my family to survive for more than a year or 2.
Had I instead taken a term insurance for the same 5L, my premium would have been Rs 1850(approx) only, the rest 18150 could have been placed under recurring deposit of 8% which would mature to 15L after 25 yrs. So 15L + insurance of 5L at the same 20K, you tell me now, which is right?

As my friend Suresh put it, "Endowment plan = term plan + fixed deposit..... Small portion from your annual fee goes to term plan and the rest are invested in debt which will return 8℅". Effective total returns on your premium could be 6%.

Better, as another friend Saravanan put it, the potentially best financial security is to have "Term Insurance + PPF", since neither interest nor maturity of PPF comes under taxable income unlike deposits. Endowment plans make no sense if you have this option.

Go for Term Insurance, but avoid going for single payment, as a friend reasons, lets say you die in 2 years and had you paid yearly you would have spent less than 30K for a 1 crore sum assurance instead of 2L 

There are attractive endowment life insurances: (If you still wanna go for)
A friend has an endowment insurance for a death cover of 40L for 40 years paying 4L in 2 years. Same on maturity after 40 Years can get him 10L sum assured + bonus that could be some 10-15L, totaling to 25L. Just pause for a min and think, who effectively will use that money that comes after 40 yrs (>70)? But instead, on his own analysis, had he taken a term insurance paying 15k yearly, he could easily get a cover of 1 crore and the rest 3.85L would fetch better deposit interest returns in 40 years(>1c). So if you take endowment, makes good sense to take it for lesser years like 20 instead of 40 so you would get the money in hand at a time you could effectively use instead of after 40 years. A term insurance should be for as max number of years as possible

What about housing? Aren't they an alternative financial assurances?
One friend asked, if you can buy a home/flat and create wealth, what is the need for term insurance at all?
While I puzzled myself at the question, another friend answered, with term insurance you just spend 2 lakhs (hdfc single premium plan) for a cover of 1 crore for 30 years compared to a Flat of 40L, add to that the loan interest.

What about Mutual Fund SIP? SIP or any investment option, never is comparable to insurance. Insurance is a completely different category. Investments sure create wealth but you comparatively invest multiple times the money that you would do on a term insurance for a similar financial assurance. 

When is the right time to buy term insurance?
The time is Now. I suggest you take term insurance ASAP, especially before 30, because every year that you delay, around Rs 1000 increases in the yearly premium
People delay term insurance because in the end of the policy term, you get nothing. There could already be 1 or 2 endowment life insurance plans and some investments, that is the same reason i have delayed it as well and now i regret after all analysis and discussions, it is more than itching when I think what happens if i suddenly die

What is the best term insurance plan?
On my research and recommendations from friends, looks like HDFC click 2 protect plus is best in this category....they offer term up to 40 yrs and more, they provide more flexibility and additions compared to others.

I looked at LIC's e-term (online) which is costliest compared to ICICI or HDFC but has best claim settlement ratio. So key is the 'Claim Settlement Ratio' which simply means, higher the value of CSR, lesser the difficulty for your family in getting the settlement on your demise.

Also looked at ICICI icare brochure which gives instant online term insurance without even medicals but the moneylife article below details you more on the caveats, suggests you to avoid it if you are a healthy non-smoker and make sure to choose a term plan with medical check up, 

From the below moneylife article:"a medical check-up is a good idea from the customers’ perspective. A check-up can’t catch all the medical problems and claims can still be rejected on non-disclosure grounds, but there is some proof with the customer in case the claim goes into litigation in case of claims rejection. Whether the product will have higher claim rejections due to lack of a medical test cannot be predicted at this time, but a customer aware of insurance intricacies would rather buy an insurance cover with a medical check-up rather than having the convenience of buying ‘instant’ life insurance."

Thanks to my friends Ravi, Jitendra, Nandini, Antony, Suresh, John and Saravanan for involving in the discussion and providing valuable inputs

Who is your best friend?

Who advices and pressures you to pick a term insurance and PPF ASAP. By the way for you, it is me the best friend if you have read it till here! ;-)

All details provided in this blog post are done in good faith to help everyone. Please do your research before concluding any decision. i accept no liability for the content of this blog post, or for the consequences of any actions taken on the basis of the information provided here in this blog post. 

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