A term life insurance plan is taken primarily to provide financial support to the family in case of the death of life assured. Therefore, the fundamental need for buying a term life insurance plan is financial protection, says Anuj Mathur, CEO, Canara HSBC Oriental Bank of Commerce Life Insurance Company Ltd. In an exclusive interview with Navneet Dubey, he talks about the various implications of term insurance and how to calculate one’s insurance need. Excerpts:
Why should one consider buying term life insurance?
Term life insurance is important to cover your future expenses and current liabilities, in case you are not there tomorrow. It is the most affordable form of insurance as the only benefit it provides is on the death of the life assured. Term plans are available online or offline with many insurers, and with upcoming technology, term plans are easy to compare and can be purchased with ease.
What if a term insurance plan expires at one’s age of around 55 to 60 years? Do we need to buy an insurance cover again? If yes, then which policy?
A term insurance plan is cost effective if bought at a younger age and for a longer duration of coverage. Term insurance is primarily bought to cover one’s existing and future financial liabilities, which usually tend to reduce with age. Therefore, at higher ages (55-60 years) if the term cover has expired, it may be expensive to buy a fresh term cover, especially if the health condition of the individual has deteriorated. Therefore at that stage, one should only go for a term cover if there is a need to be covered till a longer duration. Moreover, the needs of the individual would have changed at higher ages and one should seek regular retirement income (Immediate Annuity) or short term savings (Endowment plans with short pay and term options). The other need at higher age is protection against health-related expenses and cover for critical illnesses which have the tendency to exhaust the lifetime savings of the individuals.
What is the best way to calculate life insurance need?
The best way to calculate life insurance need is by carrying out a thorough need evaluation. Life insurance needs may differ from person to person and hence each individual should calculate his/her needs independently. Though some people believe in calculating the need for life insurance by a ‘rule of thumb’, i.e. 10 or 15 times the annual income, a proper evaluation must be done in order to be adequately covered for the right duration. Some of the key parameters to consider while calculating the life insurance needs are – current income and future earning potential, current savings (land/assets) and investments, monthly/annual expenditure with consideration of inflation, any future liabilities to be fulfilled by the family in one’s absence.
What is level term insurance?
Level term insurance is where the premium rate charged to the customer is leveled for a particular age at the time of entry. In reality, the mortality rate increases with age and hence if level premiums are not arrived at, the customer will have to pay a different premium each year. Therefore, for simplicity of design, a level rate is arrived at in pricing. Level term insurance is the most prevalent form of term insurance which is taken up by customers all across.
How much return do we get on a normal insurance policy over a period of time? Do we get returns on term plans also?
Return on an insurance policy varies from plan to plan. An insurance policy with higher savings component may yield better return over a period of time. On the other hand, a term plan offers pure protection and hence it offers no returns on survival. Product categories such as Unit Linked, where the returns are linked to the markets (depending on the type of underlying investment), may offer returns depending on the market performance which is generally better than other investment options in the long run. Therefore, returns from an insurance policy entirely depend on the product category, benefit structure, duration of the contract, market scenario, underlying investments etc. However, we recommend every person purchasing insurance to thoroughly scrutinize their policy documents before purchasing the plan to ensure that their needs and the product’s benefits are adequately matching.