Benjamin Franklin?s saying, ?In this world there is nothing that is certain except death and taxes? has never before failed to tickle the funny bone. However, today, we talk about the more serious and somber part of the saying, no not taxes, it is death. The very word represents all one tries not to think about or imagine, yet this has never stopped the inevitable from looming large over all our heads. While a monetary compensation for the family on ones demise is hardly much to write home about, looking at things from a purely financial planning stand point, life insurance is about as important as they get.

When dealing with something as fragile as life, preparing for the expected or unexpected death is always prudent. While doing so, one must realise that the policy being purchased is not for your benefit, it is for those who survive. Many feel they will never die while still earning and often tend to lean towards plans, which give them some benefit on survival. However, every household should have one pure insurance cover to support the non-earning dependents of the family during an emergency. Sadly, the insurance quotient is very low and not many are as covered as they like to think they are.

Types of life insurance

Endowment Policy, Whole Life Policy, Term Life Policy, Money-back Policy, Joint Life Policy, Group Insurance Policy, Loan Cover Term Assurance Policy, Pension Plan or Annuities and Unit Linked Insurance Plan are some of the major types of life insurances available in India. Amongst these, the most popular through the last few years has been endowment policy. However, the last years have seen Ulips or unit linked insurance plans gain in popularity as well. Though, the simplest and most important of these schemes, which we are delving into in this issue, is the term life policy.

The Term Life Policy

Akshay Mehrotra, marketing head, Bajaj Allianz Life Insurance explains, ?Term insurance provides pure protection at very low costs. It allows a person to take the right amount of insurance easily. In a savings or investment-linked plan the cost of insurance is a lot higher. This is as there is a dual usage of the money split between the ratio of insurance and investment.?

Yash Mohan Prasad, senior vice-president, HDFC Standard Life Insurance, adding to the same says, ?Basically, a term plan is pure insurance. The purpose of insurance is to indemnify a loss. In life insurance when a person dies, it is not only an emotional loss or loss of a relation, if the person is an earning member, then a source of income also dies. For many earning people a sizable chink of their earnings goes to family welfare. This continued flow of income which dies, can be projected based on a person?s normal span of life, their lifestyle, health, etc. The higher the income, the greater the loss and the higher the age, the greater the premium one pays for a similar insurance cover. Insurance creates a pool of contributors of the same profile, and as such in a pool of a thousand people, only one or two may kick the bucket. The basis of this model is that the contribution of so many pays for the unlucky few who die. This allows the premium paid by each person to be really low. The aim of the term plan is to create this pool and this is done without any add on or wrap ups, without any additional costs.?

Term insurance works on the simple mathematics of probability and since a large number of people are pooled into groups, their combined resources provide the money for those who have died, increasing the probability in the favour of the company, while allowing the option of affording a higher premium cheaper.

Each pool has people of similar probability, meaning in terms of age, finances, job risk, health and habits are more or less similar.

Uberrima fides

The foremost and most sacred rules followed by life insurance companies the world over is ?utmost good faith? or ?uberrima fides? as said in Latin.

Prasad tells us, ?As far as awareness goes, an insurance contract one must realise is based on the concept of ?utmost good faith?. Insurance companies accept statements and information based on this principle, and, if a company feels their ?utmost good faith? has been violated then they may reject the claim and refuse to pay. Therefore, one must be as honest as possible while giving details and not violate the fundamental trust factor. This whether done intentionally or unintentionally has no bearing to the outcome. The reason this law is so important is, as the insurance itself is a law of contract. This, coupled with the nature of the industry, geographical constraints, etc, one cannot verify everything. Hence, one has to accept everything in good faith, and, if this is violated, a claim can be rejected. It is unfortunately seen many times that it is the non awareness of this clause that causes problems and hence the Irda is laying a lot of emphasis on educating the people. A contract is always based on the present situation and if a person at that time discloses everything and later realises he/she has a terminally ill disease even, the claim will be payable, provided till the time of death one pays the insurance premium on time. That is the buyer?s only obligation.?

?All facts should be provided. Usually if for two years nothing has happened, then one assumes that the policy is correctly filled out. All questions should be correctly answered and not left blank. Especially dealing with health and business one should be transparent. Over my many years in the industry I?ve often come across instances when we find the agent having filled out the form and clients only signing it in the required places. This is an oversight on many policy takers part and one must always go through the form before signing it,? feels SB Mathur, secretary general, Life Insurance Council.

Why Term Insurance?

Mehrotra elaborating on term insurance benefits by saying that, ?If a person has just started working then he may not yet have enough savings yet. However, based on projections, he may still require an insurance cover of Rs 10 lakh. In this case, a term policy is easier to afford for the amount of insurance.

Especially when one does not have enough money to start off with high monthly savings, then starting small and growing your insurance cover over the years is better. The simple rule of eight states, that if one earns Rs 5 lakh an annum, then they should have a life insurance of at least Rs 40 lakh. Now to achieve this the person may have to take two plans, one term plan for a majority of the insurance, and one saving or linked plan for the rest.?

?Term insurance becomes important and essential when, the policy holder has a high commitment towards his/her family members, with a majority of them being dependents and who would take some time to stand on their own feet. However, saving enough money on ones own to meet this expense in case of an emergency, and, here again a term plan can provide a large cover without too much money needing to be spent, giving the holder affordability. For most investors who have jobs or businesses, managing both their investments and other work becomes very cumbersome, and, thus savings is also a component of this sector. When a term plan is mixed with a savings feature, it is an endowment insurance plan, which is the most popular. However, when one is relating their insurance to their pension then a term plan will give them more money in case of death, since, in an endowment plan a portion of the money goes towards savings, says Prasad.

GLN Sarma, chief actuary, Bharti AXA Life Insurance, while further expanding on the virtues of term insurance and how it is related to its term and a person?s age explains, ?Term insurance is a protective insurance. It is a simple plan. You choose the premium you can pay, choose the term of your cover and you?re set. The benefit is if anything, the sum assured to the policy holder, payable during the term. If the person is alive during the term then nothing is payable. Longer the term, cheaper is the premium, and, for a larger insurance cover as well. Therefore, the earlier one takes a cover, the better the deal, as the mortality risk increases with age. If a person is 30 and wants an insurance cover for 30 years, then his premium is very low. If a person is 40 and wants an insurance cover for 20 years, then even though the cover for both people is till they are 60, the cover for the second person will be higher. This is as the risk increases with age. We suggest that people should plan for their future based on their expected premium paying capacity. A perfect policy cover is when the premium and cover are compatible. In term insurance plans are available till one is 65-70 years these days.?

Watch out for

The golden rules when dealing with life insurance are, be honest, read everything, especially the fine print and make sure you personally verify everything that you sign on. Also, since products like insurance are sold more at an emotional level than a financial one, must always keep the bigger picture in mind.

Mathur explains, ?While term insurance is very simple and good, Indians by nature like to save and hence term insurance has not been sold so aggressively. People put up huge hoardings and advertisements for insurance plans, which give decent coverage at very low premiums. Saving along with protection is currently highly promoted. I cannot comment on the effectiveness or usefulness of this product since it is a mixed bag. However, it does provide one with many options. Riders are becoming very popular and people tend to go in for them. These are however, a more expensive option. Life insurance as a product is mainly for adults who are earning. However, these days people buy insurance for kids as well and this is more out of sentimental value.?

?If a person misstates their health status during the time of taking the policy then the claim is rejected. If a person lies about their health, family history, income and other questions then too the claim is rejected.

Some people also fill out the form based on their advisors or agents opinion. This is unfortunate since the agents are all told to ask the policy taker to answer all questions accurately and honestly. The big issue is often when a person has not revealed all their health issues, as by doing so, their premium may have been higher or policy itself rejected. It is at the time of underwriting that if these things are not represented, claims can be rejected. Answering all questions related to age, occupation, income, family health history is of utmost importance.

Often, the occupation is misstated and in reality it may be a lot riskier. Sometimes, we find that the earnings are misstated and are a lot lower.

Even, on health issues, if a person has visited the doctor on health issues other than the normal common illnesses or undergone surgery in the last 5 years, and fails to mention the same, the claim is rejected. For such small matters we often come across families being cost their future, and, then they blame us. The utmost good faith is the most important principle for us and if this is violated we do reject claims.?

?The common error people make while dealing with term insurance occur mainly on those policies that are offered across the counter and have a very simple underwriting process. To be safe, I suggest, one should disclose all information, relevant or irrelevant, that you are aware of,? Sharma cautions about while dealing with intricacies of the industry.

Mehotra in his dealings has seen a lot and he feels, ?Only non disclosure of information can lead to rejection of claims, otherwise, if one has just made a mistake in documentation or information, one can always change the errors. Be honest in your medical test and form, and, you will be fine.?

Options

?One needs to decide how much to take and plan accordingly for it. A term and savings both are useful plans, especially a healthy mix between them. A Ulip too allows one to go in for higher insurance cover.? feels Mehotra.

?Ulips became popular due to the whole stock market boom. A Ulip also is more suited for those with better financial literacy. It offers one transparency and one can monitor it daily. It also gives one the option of taking a growth or risk option or a secure one, by changing their investments from equity to debt.

In Ulips, the insurance company has a lesser risk and the policy holder a greater one, hence these are highly promoted. Last year, people bought Ulips with their eyes shut, but, this year sales are down,? feels Mathur.