Publication: BUSINESS STANDARD, Mumbai; Date: Sep 7, 2008; Section: Insurance;
With insurers slashing term plan premiums by up to 40 per cent, this is an opportunity for customers to shift from their high-cost insurance policies.
The best thing you can buy from an insurance company is – an insurance policy. However, we often end up buying high-cost endowment or unit-linked insurance plans (Ulips). The argument is that there should be some returns, at least from any investment.
Over the years, term plans have been shabbily treated by life insurance companies. No wonder they form a very little part of their overall sales. In fact, if one wants to buy it, most insurance agents would try to sell you anything but a simple term plan.
A term plan is the most basic form of insurance that offers only life cover and no maturity value. That also makes it the cheapest form of life insurance because the policy holder stands to lose his entire premium if he survives the tenure. For a 30-year old, the premium for a Rs 50-lakh cover for 20 years would come to a mere Rs 15,000 a year.
To promote them, the Insurance Regulatory and Development Authority (Irda) has reduced the solvency ratio requirement. The solvency margin requirements are prudential norms on the capital requirement for insurance companies. These margins ensure that insurance companies have sufficient money to settle claims and clear liabilities.
They are the equivalent of capital adequacy ratios for the banking industry. Obviously, a direct interpretation of this reduction implies that the premiums for term plans should come down. Though only two companies – Bajaj Allianz and Kotak Life Insurance – have reduced their premiums now, there are expectations that others will follow the suit.
All this should sound like music to insurance buyers. This is an opportunity to evaluate one’s expenses on insurance cover. Look at insurance as pure risk transfer and a risk protection tool instead of a money-making instrument. The basic purpose of buying it should be to take care of family needs, in case of an untimely death of the policy holder. Here are some tips on what you should be doing, in case you already have endowment plans and Ulips instead of term plans.
Age between 20 and 30: The odds are that you are single and independent. And though you may not actually need it, a policy may have been bought just to save tax.
In such a situation, especially only if a couple of premiums have been paid, you can consider the option of surrendering the policy after it becomes eligible. Even if you have dependents, you can take this option because a term plan will help you get a higher assured sum for a lower premium. This would ensure that your family has a higher risk cover. Invest the remaining amount in mutual funds. (See Example)
Age between 35 and 45: You are fast approaching the middle stage of your career.
The likelihood of you being married with young children, dependent parents and financial liabilities, such as home and car loans, is high. The need for a life insurance cover at this stage is extremely high for this age bracket. It’s extremely important that you have adequate life cover.
There are many who are paying premium in lakhs of rupees, yet the cover is low because they are fixated towards tax savings and investment returns. Hence, they buy an investment-oriented plan where they can save tax and also get returns the end of the term. To achieve this goal, they end up paying very high premiums for a inadequate cover.
In such a scenario, analyse your overall liability and buy a term plan accordingly. Once this has been done, surrender your traditional policies, especially if they are long-term in nature and there are many more premiums to be paid (at least 10 or more). Retain policies, if 60 per cent of the premium has already been paid and only a few years remain to complete them.
Age between 45 and 55: People in this age group would mostly be approaching the end phase of their policy tenure. Continuing the policies make much more sense now because you do not have much to lose. Also, there are several plans, where after paying for a stipulated period, there would be no premiums in the last few years.
There are chances that a lot of assets have been accumulated by this time, too. And since any plan is quite expensive at this age, only buy a term plan that is not too heavy on the wallet. However, if you are stuck with an investment-oriented policy that has been bought recently, it is best to quit it. The premiums at this age would be too high.
The writer is director, My Financial Advisor
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