Do you have adequate life cover? Find out
An endowment policy can provide some form of life-risk cover but investors should consider buying the no-frills term plan to increase the coverage amount at a fraction of the former's cost.
While most people can claim to have life insurance cover, not many will pause and think if the coverage is adequate for them.
Life insurance is often an under-utilised instrument and the reasons for its neglect are many: some are not convinced about its benefits while others use it as a tax-saving instrument. Some use insurance as primarily an investment product by buying 'endowment policies' (traditional, money back plans or ULIPs) -- policies that provide insurance cover as well as maturity benefits.
While expectations of returns from investing in endowment policies are justified, one must remember that the risk cover these policies typically provide can be far from adequate as the cost of getting adequate life cover through an endowment plan would be prohibitively high.
For instance, consider a healthy male aged 30 years, who has a wife and a child, and is the only earning member of the family. He has an outstanding home loan of Rs 20 lakh and a personal loan of Rs 2 lakh -- he wants to buy a life risk cover of Rs 50 lakh for a period of 25 years. If he plans to get this life cover by purchasing an endowment plan, the annual premium would come anywhere close to Rs 2 lakh per annum, or a monthly contribution of Rs 16,666, which could be expensive for the average middle class person.
At the same time, there is another product which can provide the same amount of insurance cover at a much cheaper rate -- nearly 13 times less than the annual premium of the endowment plan or a mere 7.3 per cent of the annual premium of the endowment plan. It is called a term plan.
A term plan for the same individual mentioned above for the same risk cover and period would cost just Rs 14,750 per annum -- a monthly contribution of Rs 1,200. If even this amount is expensive, an investor can reduce the tenure to five years, in which case the annual premium would come close to Rs 10,500 per annum -- a monthly contribution of Rs 875 only, which may be close to what an individual could spend for a weekend outing meal with family.
Some companies have also come out with online term insurance plans (which do not include agent commissions, etc), which reduce the premium further by a half to one-third.
The question, then, is that in spite of term insurance being such a cost-effective product, why is it not bought by many people? The answer is: several people expect getting returns for the money paid as premium for buying life insurance.
Term insurance is similar to a mediclaim or a car/property insurance policy, where you expect payment only when you make a valid claim, or the premium is not paid back -- except that in the case of term insurance, the claim is made only when the insured person dies and the nominee becomes the beneficiary.
But while most individuals view medical or car insurance as mandatory, some hesitate to take the same mental decision when it comes to leaving nominees with a corpus for sustenance and repayment of existing liabilities in case of untimely death and take the easy way out -- compromising on the life-risk coverage amount by buying an endowment policy.
But in such cases, often the question continues to remain: do you have adequate life risk cover?
Photographs: Rediff Archives