16 December, 2017

A steady income to the family, even after you are gone!

Insurance is for providing security. In life insurance, this fundamental fact had all but been forgotten. But recently, term insurance has got a lease of life. This inspite of the fact that most insurance agents are not very keen to sell term insurance as the premium is low, medical requirements are high, chance of rejection or extra premium is real etc. However, financial planners, bloggers & media has been spearheading the virtues of opting for pure insurance policies. Hence, in the past few years, things have changed dramatically.
Online term insurance has become mainstream & opting for term insurance itself, has become fairly commonplace. Sensing this opportunity, many insurance companies have come out with variants of term insurance policies, which enrich the landscape of pure term plans.
Joint life term policies - Recently, Joint term life policies for both the spouses under one plan, have been introduced by a few insurance companies. The logic here is that if both of them are working, they can go for one insurance policy for both. Taking the policy together does not confer any special benefit. The premium goes down by just a small amount and is not really a factor.
The life insurance requirement can change over time. For instance, the spouse may stop working and she may no longer require any life insurance. Had she taken a separate product, she could just have stopped paying the premium and terminate the product. But in a joint product, it cannot be done as the other spouse, the husband, would still require the cover. Hence, in this scenario, the cover will have to be retained & unnecessary premiums need to be paid.
Also, in the unfortunate even of separation, this policy cannot be separated. Infact, one may have to close this policy completely and take up new policies, which is probably not the best option.
This product hence works emotionally and does not have real merit.
Term plans with benefits distributed overtime -  There are other variations of term insurances, which can be useful. Usually term insurance offers to pay the Sum Assured in the event of a claim. In case of term insurance policies, the amount involved can be quite significant – like, say, Rs.1 Crore. If the sum available from the policy is deployed prudently, it could be useful in meeting the goals, as well as for providing for ongoing expenses. But, in some situations, the claim proceeds may not be prudently deployed. Or it may be frittered away in wasteful expenditure or reckless investments which can result in hardship for the family, going forward.
Now, there are policies which in the event of death of the policy holder, would offer a certain amount of money ( say 10% of the Sum Assured ) as a lumpsum amount upfront & the balance in monthly installments over 10 or 15 years. This could be invaluable for families. Let’s see why.
In many families the male member tends to manage the finances. If he were to pass away, there would be a vacuum. In this vacuum, many people tend to step in and try to assist the family. However, the advice offered about finances may not always be sound and the financial wellbeing of the family can deteriorate significantly. This is a possibility.
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 stabilize, live with dignity & meet all upcoming goals.
Further variations & options -  Now, there is a variation of this policy too. The variation is that it offers an increasing payout every year for the agreed tenure of the payment. This is to adjust payouts to account for the effects of inflation.
There is another feature some of the term plans have. There is an option to increase the Sum Assured at the occurrence of predetermined life events like marriage of self, arrival of a child etc. This would happen without medical examination, upto a particular level. The premium would be set as per the prevailing age and premium tables. This could be very useful as one need not look around for another separate policy to account for increased insurance needs in the future.
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 tend to be costly.
Now, term plans have stepped into the breach and are offering similar benefits like a typical child plan would.  In case of plans which have this benefit, a certain portion of the Sum Assured ( say 50% ) is paid in the event of death of the Life Assured. The balance is paid on a monthly basis, at agreed levels, till the age 21 of the child. This would ensure that the child education or other goal will 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 -   Though the amount is coming over time just like in case of a pension product, the monthly payouts are not taxable as it is still death claim payout, 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, taxes will not be there in the future years based on investment income generated ( or it will be low ) from the regular payouts.
Conclusion –  Insurance industry has innovated wonderfully in the term plan space. First they came up with the online term plan option. Now they have come up with a pail full of variants that have great merit. The common man is finally able to ensure that his family will be well protected – in his afterlife too! His benevolent presence will be felt long after he is gone!
Article first published on Linkedin: A steady income to the family, even after you are gone! 
Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in

#SureshSadgopan #FinancialPlanner #FinancialAdvisor #Fiduciary #LifePlanning #FeeOnly #HolisticAdvice #Ladder7

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