15 September, 2015

Term insurance plans with extra benefits

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Insurance is for providing security against an unforeseen event. This aspect has long been forgotten in life insurance. But recently, term insurance plans have got a new lease of life though they are not very popular. Agents are not keen to sell them due to low premiums, medical requirements are high, and there are chances of rejection. But online buying is changing the game. Sensing an opportunity, many insurance companies have come out with variants of term plans which enrich the landscape of pure term plans.

Joint life term policies

Recently, companies have introduced joint life policies where both spouses are covered in a single plan. The logic: if both of them are working, they can go for one policy. Taking the policy together, however, does not confer any special benefit. The premium goes down by a small amount.

The life insurance requirements, however, can change over time. For example, the spouse may stop working and she may no longer require any life insurance. Had she taken a separate plan, she can just stop paying the premium and terminate the product. But in a joint policy, it cannot be done as the husband, would still need the cover. It, therefore, has to be retained and unnecessary premiums need to be paid.

In the unfortunate event of separation, this policy cannot be split. One may have to close this policy and take up a new one, which is probably not the best option. This product hence works emotionally and does not have a real merit.

Term plans with benefits distributed overtime

There are other variations of term insurance, which can be useful. When the insured passes away, the companies usually pay a lump sum amount to the beneficiary, which can be significant - say, Rs 1 crore. If the lump sum payment is deployed prudently, it could be useful in meeting the goals and can provide for ongoing expenses. But, this is not usually the case. Sometimes, it is frittered away in wasteful expenditure or reckless investments which can result in hardship for the family.

Now, there are policies, which in the event of death of the policy-holder, would offer a certain amount of money upfront (say 10 per cent of the sum assured) and the balance in monthly instalments over 10 years or 15 years. This could be invaluable.

In many families the male member tends to manage the finances. If he were to pass away, there would be a vacuum. In such situations, friends and relatives step in to assist the family. However, the advice offered may not always be sound and the financial well-being of the family can deteriorate.

In such a scenario, a term policy which offers staggered payments over 10 or 15 years will ensure that the family will get regular income over time. Even in a situation where the initially-available corpus is compromised and lost, the consistent income overtime will help the family to stabilise and live with dignity.

Other options

There are further variations too; such as an increasing payout every year for the agreed tenure. This is to adjust payouts to account for inflation. Then, there is an option to increase the sum assured at the predetermined occurrence of life events like marriage of the insured, arrival of a child, and so on. This would happen without medical examination, up to a particular level. The premium would be set as per the prevailing age. This could be very useful as one need not look around for another policy when the insurance need increases.

Term plans linked to child goals

Child plans have been a hit with parents as they want to ensure that the education and other goals of their children can proceed uninterrupted, even if they are no more. These policies, however, tend to be costly. Term plans have stepped into the breach and are offering similar benefits. In this, a certain portion of the sum assured (say 50 per cent) is paid in the event of death of the insured. The balance is paid on a monthly basis, at agreed levels, until the child turns 21. This would ensure that the child's education or other goal proceed uninterrupted.

The period of payout will be based on the timing of the death of the life assured. For instance, if the policy holder passes away when the child is 18 years of age, the regular payouts will only be for three years (till age 21 of the child). Hence, the monthly payout period can be much lower than in the other option discussed earlier - where one will get monthly payment consistently for 10 - 15 years. In the event the initial available money is frittered away, the regular monthly income can be for a much shorter period, which can be a problem area. Else, this is a great option and is a viable alternative to costly child plans.

Tax implications

The monthly payouts are not taxable as it is a death claim, even if it is over a period of time. Only the investment returns of any deployed amount would be taxed as applicable. There is a positive in receiving the payout over time. Since the payouts are going to come over time and most of it is going to be spent as they come, there won't be any tax liability in the future.

Insurance industry has innovated wonderfully in the term plan space. First they came up with the cheaper online term plan option. Now they have come up with a pail full of variants that have merit.

The article was published on Business Standard on 12th Sep-2015

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