Life Insurance and why You should buy one

Several investors especially those who are young, do not see the need to purchase life insurance. They consider it a waste of money since they do not get any ‘returns’ from the money they spend in buying insurance. Before a person starts investing any money, he/she should first look at protecting their current assets. Insurance is an instrument which saves you & your family from a catastrophic financial loss. Unless you consider yourself immortal and are sure that no accident or fatality would occur to you, you should consider buying insurance. On the other hand if your family is dependent on your income or if you have any debts/loans that you need to pay off, Life Insurance is no longer an option but becomes mandatory.

Of the different options available in the market – Term Insurance, ULIPs, and Endowment Plans etc my vote is for the traditional term insurance which allows you to insure your life for a good amount of money at a relatively small premium. The premium depends on your age, health and some other factors. If you survive the term, you do not get anything. A lot of investors shy away from this product because they feel that they end up with nothing at the end of the term (if they survive the term). However, this product provides their family protection from catastrophic financial losses due to the death of an earning member. The objective of insurance has always been protection. It is an instrument designed to protect your family not to make you loads of money!

Three questions that people ask when they plan to take a Life Insurance term Policy are:

1. What is the amount for which I should insure myself?

There are various approaches to go about this. Some people go in for a thumb rule which states that you should be insured for about 8 - 10 times your annual salary. So if you earn Rs 5, 00,000 a year, you would have to insure yourself for Rs 40 - 50 lakhs. Like all thumb rules, there is no clear logic to this and has probably come into place through the experience from various cases observed by Insurance companies.

The second approach is called the ‘Needs’ approach wherein a person seeking insurance should make a list of all his/her financial needs & commitments. For example: If he has taken a home loan for Rs 20, 00,000 & his family requires about Rs 30,000 per month for expenses and he expects the cost of living for the next 5 years to rise at 5% annually, he should insure himself for close to Rs 80 lakhs (8 million) to 1 crore (10 million) for a term of 20 years. If a person takes this insurance when he is 30 years old (non-smoker & no chronic illnesses), he could get this protection for an annual premium amount of about Rs 14,000!

2. Do you need to take a new Policy if your Policy has lapsed?

Policy revival is possible but there are certain rules and regulations governing the same. Revival reinstates the benefits to the beneficiaries. According to the insurance regulator IRDA, if a policy has been in force for at least three years, the insured has the chance to revive it for a period of up to two years.

Within The First Six Months Of Lapsation: If the policy is revived within the six months of lapsation, then the process involves just paying off the premium which was overdue along with the interest and your policy will be revived.

After The First Six Months of Lapsation: If the policy is revived after six months of lapsation, you need to pay the interest, outstanding premium amount and penalty. This will differ from policy to policy.

Therefore, the insurer can impose conditions such as asking you to take a medical test before the policy is revived so as to make sure that you, the insured have not developed a new medical condition during the period when the policy had lapsed. Even after the revival of the policy, if the insured commits suicide within one year of the policy’s revival, the insurance company can reject the insurance claim. Also, if the insured dies within a period of two years of the policy revival, the insurance company reserves the right to conduct an enquiry before paying off the claim to the beneficiaries. If the policy was inactive for at least three years, the death benefit ceases and the surrender charge may be as high as 100%, resulting in the family getting no money. While IRDA has stated that the lapsed policy can be revived within a period of two years if the policy was in force for at least three years, the insurance company can decline an application for revival if it is not convinced about the integrity of your application, that is, the insurance company would like to make sure there is no intended or suspected fraud.

3. Can Beneficiaries File A Claim If The Policy Has Lapsed?

If the policy was active for a period of more than three years, as per IRDA, the dependents can get some benefit. Again here, the beneficiaries will not be entitled to the full sum assured. The insurance company will pay a reduced sum assured based on some pre-defined formula, which is typically the number of payments made to the total number payable. This will entirely depend on the time period for which the policy was active. If the policy was active for a period of less than three years and an insurance claim is filed by the beneficiaries, the insurance company has no obligation to pay off anything. In certain exceptional cases, the insurer might be willing to pay the beneficiaries the premium payments made by the insured.

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