Should You Buy A Larger Cover?

What should you do if you find that your term life insurance cover is insufficient to meet your dependants’ needs? Jay Sampat answers.

KEY POINTS:

• At various points in life such as marriage, having a child or taking a substantial loan, individuals typically see a need to increase their insurance cover.
• The reduction in premiums over the past five years has caused most people to rethink their existing policies, with regard to whether they should continue with their existing insurance cover or close it and opt for a new, larger cover for a cheaper premium.
• Insurance companies have introduced term life insurance policies with the option of increasing the sum assured each year, stepping-up the cover for specific requirements, reducing the sum assured by paying a nominal fee, as well as specific riders.

Studies on the insurance sector in India are pointing to the fact that with rising disposable incomes, Indians want their lifestyles to be protected. Most Indians attach the highest importance to protection of family income, children’s education and saving for retirement, in that order. It is for this reason that many young executives are buying a term life insurance as soon as they start their career.

While this is a step in the right direction, what is a cause for concern is that most of these covers are extremely small and hence, prove inadequate when the insured passes through various stages in life such as marriage, having a child or taking a substantial loan. At times like these, individuals typically see a need to increase their insurance cover. Various factors need to be considered while doing this.

When it comes to term plans, one should definitely consider online options, as plans sold through online channels are extremely cheap.

The reduction in premiums over the past five years has caused most people to rethink their existing policies. This also raises a question as to whether one should continue with one’s existing insurance cover or close it and opt for a new, larger cover for a cheaper premium. For example, in 2006, a 25 year-old male would have paid an annual premium of approximately Rs 2800-3800 for 30 years for a cover of Rs 10 lakh. Today, a 31-year old male can buy a cover of Rs 1 crore by paying an annual premium of Rs 8000-12000 (non-smoker males, without including taxes and premiums for additional riders).

If the premium on the new policy is far lower than the existing policies, you are better off going for a large sum assured policy and discontinuing the old policy. This is more relevant if your existing policy is for a short period of time, say 10 years, and the new one will cover you till retirement. Most life insurance products have a cover ceasing age of 70 years and a maximum term of 30 years. Also note that premiums see a steep increase post the age of 40. Hence, it is ideal if you can buy a term life insurance plan at the age of 40, so as to get the maximum cover at the least possible rates.

Experts are of the opinion that individuals should ideally review their life insurance needs every five years. This is especially so because with advancement in one’s career, income goes up and so does one’s lifestyle. Also, events such as buying a house funded by a home loan, marriage and childbirths are events that support the need to buy additional life insurance cover.

Insurance companies have identified this need and have introduced term life insurance policies with increasing cover, where the sum assured increases by five per cent each year. On the other hand, a few companies offer their policy holders a step-up option in which the policyholder may choose to increase the cover in case of marriage, childbirth or a house purchase. In some policies, you can also choose to reduce the sum assured by paying a nominal fee.

Term plans also offer a wide array of riders ranging from accident disability benefit riders to critical illness riders, which can be used to enhance the features of one’s cover. Of course, you must know your specific needs before you are ready to buy a cover with riders. For instance, if you have a family history of critical illness, such as heart ailments, it is a good idea to go with a critical illness cover. If you are a road traveler, you can go in for an accident disability cover.

In all cases, one must read between the lines to be sure about what one is getting into. For instance, a standalone critical illness cover sold by a non-life insurance company will cover you for as many as 30 critical illnesses, whereas the critical illness rider offered with term life insurance may cover far less critical illnesses.

Life insurance is an important investment that can protect your family’s assets at any stage of your life. Whether you are single or married, part of a large family or a small one, purchasing insurance is a responsible step that everyone should take so that their loved ones will be provided for. Your age will also determine how much cover you need, how long you need it for, and whether a term or a guaranteed policy is the best for you.

Moreover, it may not be possible to buy a new policy at every stage in one’s life, and hence, one should make an informed choice while adding a policy. One must also look for policies that come with built-in benefits.