Term Life Insurance – Simplified

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Kalyani Narayanan, CEO and Principal Officer says,

Term life is, by far, the simplest life insurance policy to understand.  Basically, it is the vanilla version of all life insurance policies.  So, what is term life insurance?  A person takes insurance on his life for a certain amount (called sum assured) and for a certain number of years (called policy term).  For example, Suman takes a term life insurance policy for Rs 1 Crore for 25 years.  If Suman dies anytime in the 25 years, then the insurance company promises to pay Rs 1 Crore to the person nominated by Suman.  For this promise, Suman pays about Rs 14,000 every year to the insurance company.  This money is called Premium.  So, what happens if Suman does NOT die in the 25 years?  He does not get back any money from the insurance company.  At the end of 25 years, the policy ends and neither Suman nor the insurance company owe anything to each other.

This article mainly talks about Term Life Insurance in a question and answer style.

What is Term Life Insurance?

It is a life insurance taken for a specific amount and for a specific number of years within which if the life insured dies, the nominee gets the amount from the insurance company.

Why take life insurance?

It is mainly to ensure that those family members who are dependent on the income of one person do not end up in hardship if that one person dies young.  For this that one person takes life insurance.

Do you need life insurance?

Do you have family members who are dependent on your income?  May be your parents, your spouse and children, your brothers and sisters?  Then, yes, you need to have your life insured

What should be the insurance amount?

Take the gross money you earn per year. Multiply it by 25 if you are younger than 35.  That should be the amount you should purchase the policy for.  For example, if your gross salary is Rs 15 lakhs per annum and you are about 35 years old, then you should have 15 lakhs X 25 = Rs 375 lakhs or Rs 3.75 Crores.  If you are older than 35, then take life insurance policy for an amount that is 20 times of your annual salary.  This is called sum assured or death benefit.

I already have some life insurance policy?  What should I do?

Add up all the life cover you have and see if it is enough as per the above calculation.  If not, get additional cover for the deficient amount.

For how long should I need the life insurance?

For as long as your family members are dependent on your income, you need the insurance.  This is generally till you retire, say at 60 or so.  For example, if you are 35 years, then take policy for another 25 or 30 years.   This is called policy term.

What are the different kinds of policy there is?  Which one should I take?

There are broadly two categories of life insurance policies:

(1) Term Policy - Covers only life – if the person who is covered in the policy lives on beyond the policy term, he            does not get any money back from the insurance company.  The policy ceases to exist.

(2) Savings Policy - Covers life + some money is there as savings – If the death occurs during the policy period, the        dependents get the sum assured. If person lives on beyond the policy period, then he gets the sum assured.

The first type of policy is a lot less expensive than the second kind. For example, if a non smoking male of 35 years wants to purchase Rs 1 crore of policy, till he is 65 years old, then he has to pay roughly Rs 12000 – Rs 15000 per year.  If the same person wants Rs 1 Crore as death benefit but also wants about Rs 1 – 2 Crores from the insurance company even if he did not die when he is 65 years old, then, he would have to pay about Rs 3,50,000 to 4,00,000 per year.  Basically, the company takes the additional money it collects from the policy holder and invests the same and pays him/her at the end of the policy term.

So, your priority should be to first get term life policy which covers only life so that your dependents do not suffer if you are not around to fulfil all the financial commitments.

What about tax savings?

The premium paid towards the term life policy along with riders is deductible under Sec 80 D.

So once I purchase term life, what do I do?

Ensure that you pay your premium on time.  In addition, year after year, your annual earnings would go up and your dependent’s lifestyle also goes up.  Therefore, you need to make sure that your total life insurance continues to be 20 or 25 times more than your gross annual income.  At 35, your annual income may have been Rs 5 lakhs and you may have purchased a policy for Rs 1 Crore, but at age 45, if your annual income is Rs 15 lakhs, then 20 times is Rs 3 Crores. You are Rs 2 Crores short.  So, you need to purchase another policy for this amount.

What are Riders?

Riders are additional features/benefits that you can optionally purchase over and above the base term life policy.  It is like additional topping such as chocolate sauce and nuts on your vanilla ice cream.  Generally, additions are considered ‘nice to have’, not ‘need to have’.  However, the riders on term life need a careful consideration.  Some of the most popular riders are:

a. Accidental Death Rider – This option generally pays twice the life cover if the person insured dies in an   accident.  An accident does not mean just road accident.  This could be any accident like falling while walking sustaining head injuries causing death as an example.  In the above example, if the 35 year old non smoking male gets life insurance and also opts for Accidental Death Cover Rider, then he may have to pay additional Rs 1000         or so to get this benefit.

b. Accidental Disability Benefit – Sometimes when one gets involved in an accident, the best thing that can happen is death.  What if the person does not die but is totally disabled?  The person not only unable to provide for the family that depends on him/her, the person also adds to the burden of the family to take care of him for the rest of life.   The disability rider provides the family with a sum if the insured person is permanently disabled.  Depending on the severity of the disablement, the percentage of reward amount is determined.  In the above example, it may cost about Rs 2000 to Rs 3000 more per year to add this rider to the base term policy.

c. Critical Illness Rider – There are many dreaded diseases that involves huge medical cost to get treatment, if at all.  Consider cancer for one.  This rider pays a sum to the insured if he/she is diagnosed with one such dreaded disease so that the person can get treated and become well.  It may cost about Rs 10000 more per year to avail Rs. 25 lakhs for this.

How the money is given in the event of death?

There are mainly two options given.  (1) Lump Sum option and (2) Monthly Income Option

Let us assume the person who has insured himself/herself dies during the policy term.  The family is given Rs 1 Crore which is the policy amount.  Is the family capable of wisely investing the money in such a way to live on that income?

It is very common that the wife becomes the nominee of the husband’s policy.  In such case, she is awarded the insurance settlement. If she or trusted family members do not have the required education to invest wisely, entire money can disappear in no time and the family is financially struggling to make ends meet with no one to help.

In order to avoid this situation, the term policy has the option where the policy holder can opt the amount be paid as monthly income to the nominee for several years.  By doing so, the family can better manage the family expenses better.

Therefore, if you believe that your dependents would not be able to manage the funds, then choose the monthly payment option.

In the monthly payment options also, there is a feature called increasing monthly income where every year, the monthly payment goes up to keep up with the inflation.

In my next article, I will focus on the policies that combine life + savings.

In the mean time, if you or anyone you know would like to know more about pure term life insurance, please do get in touch with us.

 

About the Author: Kalyani Narayanan is the CEO of www.easyinsuranceindia.com.  She is also a member of MRC.  She is an insurance broker who owns the site.

What is the difference between an insurance broker and an insurance agent?

Car Insurance Send feedback »

Kalyani Narayanan,CEO and Principal Officer says,

In a recent survey conducted, we came to know that about 50% of our registered users do not know the difference between an insurance broker and an agent. As a broker, I feel I need to create awareness about the difference. So, here it is

Insurance Broker, that is, 
www.easyinsuranceindia.com

Insurance Agent

Customer Benefit seeking broker to identify suitable insurance

Represents the customers and DOES NOT represent any particular insurance company

Represents only one company (one for life and one for non life)

Brokers are better equipped to meet customers' requirements

Can sell any product from any company

Can sell only the products of the company he/she represents

Brokers are able to offer wide variety of choices because they can identify policies from any company based on customer requirement

Insurance companies give us best policy benefits and premium rates for our customers since we have choice on the companies we can go to

Less influential since they represent only one company

Negotiate better benefits on policies and best premium rates (this applies largely to commercial insurance)

Insurance companies respond better to us when it comes to settling disputed claims because we represent the customers

Less influential since they represent only that company

We can represent the customer more effectively during the time of claim especially if there is a dispute

Brokers have a much more stringent norms and come under scrutiny by IRDA before getting/renewing broker license

Less stringent norms to obtain agency license

Brokers have a fully functional company to provide continuous customer service

In addition to the above, we add more value as broker to you compared to other brokers.

www.easyinsuranceindia.com is owned and operated by us - a licensed broker

Other web sites may or may not be owned by a licensed broker

Retail business is a separate focus area for us (SBU)

Most brokers focus only on corporate businesses

Full-fledged customer care, and back office to help you and answer all your questions.

No such customer care / back office exists for retail customers

We sell even non-money making policies such as third party only policy, Rural insurance, Insurance for poor, etc.

Not offered by any other brokers online because these products don't result in any earnings for brokers or event agents

Your personal/contact information is NOT SOLD or GIVEN to anyone. It is given only to the insurance company whose policy you purchase

Your personal / contact information may be sold to various insurance companies

We offer comprehensive list of all policies that a customer would ever want such as Health, life (both traditional as well as ULIP), motor including third party, personal accident, travel, home, etc.

Other sites are not as comprehensive as ours

 

Difference between Health Insurance sold by Life Insurance companies and the same sold by General Insurance Companies

Health Insurance Send feedback »

Kalyani Narayanan,CEO and Principal Officer says

Greetings !

 

You may notice that just about every insurance company today sells some policy or another that focuses on health related risks.

You should know the difference between the two basic categories of health insurance and which one is appropriate for you. Here are some basic differences:

Health policies Sold by GENERAL Insurance Companies
Health policies Sold by LIFE Insurance Companies
The expenses incurred due to hospitalization like room charges, surgery, medicines, etc. are reimbursed (or) paid directly by the insurance company (in case of cashless benefit) Fixed amount is paid as per policy, regardless of the expenses incurred. The actual expenses may be more or less.
If you have more than one health insurance, then the claim, if any, is paid by sharing between such insurances You can claim even if you have already claimed from health insurance with a general insurance company
The premium has to be paid first in one payment to get cover for the year The premium can be paid as monthly, quarterly, or annual basis
Need to wait 30 days before any claim can be made Need to wait 90 days before any claim can be made
Premium differs from one year to the next depending on claim during current year Premium is generally fixed for three years – after that, it may change
The policy term is mostly for one year The policy term is generally for longer duration, 10 years or even 15 years
Cannot return the policy after purchasing it You can return the policy within 15 days if you decide that you do not want the policy
There is no life insurance benefit or maturity benefit There may be life insurance component and may or may not have maturity benefit

Both kinds of health policies have:
  • Medical check requirement
  • Waiting period for various diseases
  • Exclusions
  • Maximum payable amount applicable

So, how do you know which policy you should purchase?

Here is what I recommend:

If your company already provides health insurance cover, then you can purchase health policies sold by Life insurance companies. If you are hospitalized, your company's medical policy will cover the expenses. Over and above that, you can still legally file a claim under the health policy that you have from life insurance companies.

Many times, when we are hospitalized, there are many expenses like caretaker's food, transportation, hospital administrative costs, etc. that the health insurance under General Insurance would not cover. If you have a health policy from Life insurance, you can make claim against this so that you can get fixed amount of cash which would help you to meet those additional expenses.

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Sources of Income checklist

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Kalyani Narayanan,CEO and Principal Officer says

Don’t forget to include the income from the various sources – Here is a check list to help you remember

Typically, as a salaried tax payer you'll need to have the following items at hand for filing your Income Tax Return. This might vary on a case by case basis.

Here’s a quick guide to the documents you will need for the Assessment Year 2012-13 that will help you prepare and file your Income Tax Return.

PAN number

Verify your PAN number online with the Income Tax Department before filing your Income Tax Return by going to this link: https://incometaxindiaefiling.gov.in/portal/knowpan.do

Form-16 issued by your employer

A Form-16 is a statement issued by your employer which has details of your Salary, the taxable salary amount after various perks and allowances, the TDS deducted by your employer, the deductions you have claimed and the overall tax due. TDS is Tax Deducted at Source. Your employer will have already deducted some portion of your salary and deposited it with the Income Tax Department. This is a good starting point to start preparing your tax return.

Bank statements / passbook for Interest Income on bank deposits

Note that you have to declare all Interest Income earned in the Financial Year 2011-12 in your Income Tax Return. A lot of people forget to do this, so please go through your bank statements and find out the Interest received.

Other Statements of Interest Income besides Bank deposits

Sometimes you may have fixed deposits which may have matured, debentures which yield interest. Take a look and make sure to declare this income on your Tax Return.

TDS certificates issued to you by your bank and others TDS may have been deducted on your Interest Income by your bank. Check whether any TDS was deducted. You can ask the Bank to issue you a TDS statement. Declare these TDS entries in your Tax Return to reduce your tax liability.

Form 26AS

This is one of the most important documents that you should look at while preparing and filing your Income Tax Return.

Form 26AS reflects all the Income Tax received by the Income Tax Department with respect to you. This is a tax credit statement which shows TDS payments, voluntary tax payments made by you.  Link to Indian Government site to view Form 26AS

This Form-26AS should match all your TDS certificates issued to you by your employer, your bank etc. If there is a mismatch you may have a tough time getting your tax refund. In case there is a mismatch between your TDS certificates and Form-26AS, you should contact your employer or your bank. They might have to inform the Income Tax Department of the TDS they have deducted.

Proof of investment under Section 80C

Investments done under LIC, NSC, PPF, school fees of your children qualify for Section 80C deductions. Payment towards the principal of your Housing Loan also qualifies for deductions under Section 80C. The maximum limit for claim under section 80C is Rs. 1 Lakh.

Charitable donation statements

Donations that can be claimed for tax deductions under Section 80G. Typically the receipt issued by the charitable organization you donate to mentions the eligibility under Section 80G.

For making sure you can avail of your tax deduction, make sure you quote the PAN number of the charitable organization.

Interest paid on housing loan.

If you pay EMI towards housing loan for a house that you live in: The Interest paid on housing loan is eligible for tax saving. The upper limit for tax saving is Rs 1,50,000. If you pay EMI towards housing loan for a property that you rent out to others: The Interest paid on housing loan is eligible for tax saving. There is no upper limit for Interest paid exemption on rental property.

Other (less common) documents: Proof of investment under Section80CCF:

Investments in Infrastructure bonds upto Rs. 20,000 can be claimed as tax deduction under section 80CCF.

Proof of investment under Section 80E:

Interest Paid on Education loan is tax deductible and can be claimed under Section 80E.

Proof of investment under Section 80D:

Medical Insurance payments for your family and your parents can be claimed here.

Proof of Disabilities

If you have disabilities, you might want to check up on Section 80U. If you have dependents with disabilities then check on Section 80DD.

Stock trading statement:

If you have sold any stock in the Financial year 2011-12, then you might have had Capital Gain or Capital Loss. This has to be declared in your Income Tax Return. Take a look at your brokerage account and then declare your Capital Gain.

Capital gain on sale of property

In case you sold any property or house or land or anything of value, you may have had a Capital Gain or Capital Loss. You have to declare this in your Income Tax Return. Overall the key take away is - Look at your Form-26AS to ensure that your records match those of the Income Tax Department.

Courtesy : Taken from Yahoo

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Explanation for common life insurance terms

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Kalyani Narayanan, CEO and Principal Officer says

Just thought I would explain some life insurance buzz words to you!  These are terms that are common terms related to all life insurance (traditional) policies. I have NOT covered the terms specific to ULIP based plans.

Policy holder

Policy Holder is the person who is responsible for making the premium payment for the policy

Life Insured

This is the person whose life is insured in this policy.  Most of the times, the policy holder and the life insured are the same person, but this is not always the case.  For example, father can take life insurance on his son.  In such case, father is the policy holder, and the son is the person whose life is insured.

Beneficiary/ Nominee

This is the person who would receive the insurance money if the life insured dies.

Insurer

This is the insurance company that has issued the policy.

Premium

Premium is the amount you pay to the insurer for them to provide you insurance cover.  This premium is paid in different ways.

Regular payment

This means you make a payment periodically (either monthly, quarterly, semi-annually or annually) for the duration of the policy payment term.

Single Premium

There are policies where the premium can be made just once instead of every year.

Policy Term

Policy Term is the number of years for which the policy is bought for. For example, if the policy is purchased for 10 years, that means, the policy term is called 10 years.  This is, the insurance company agrees to pay the sum assured to the beneficiary if the policy holder dies any time in the 10 years.  Most of the times, the first 2 years death would be seriously investigated before money is paid.

Premium Payment Term

Many times the premium payment term (PPT) may be different from the Policy Term.  For example, you may pay premium for 10 years, but the policy period may be 15 years.  What this means is that you stop paying the premium at the end of 10th year but the policy continues to be valid for another 5 years.

Bonuses

Guaranteed bonuses

Insurance companies guarantee a return. Generally, it is not given for more than five years of the policy period.  By and large, it is a percentage of the sum assured. This amount is paid to you, the policy holder, at the end of the term.  If a policy comes with a guaranteed bonus, this would be mentioned in the brochure.

Reversionary bonuses

Based on the performance of the company, the insurance company declares a bonus for its policy holders every year. You can get this amount only at the end of the term. Reversionary bonuses are declared only after guaranteed bonus period is over.

This is offered purely at the discretion of the insurance company and depends on the profits made that year.

 

Sum assured

This is also known as the cover or coverage and is the total amount that you are insured for.  This is the amount the life is insured for.

Rider

It is an optional feature that can be added on to a policy.  You could compare it to additional toppings on a pizza.  When you add additional toppings you have to pay extra for them.  Similarly, you have to pay an additional premium to avail these benefits.  For instance, you may take a life insurance policy and add on accident insurance as a rider.  What this means is when you take accident insurance rider, if the death is due to an accident, you would get twice or thrice the amount of sum insured as mentioned in the insurer’s write up.    Some of the common riders that are available are to receive twice the amount of sum insured if the death is due to accident (this is called Double Accident Cover), or get the sum assured if the insured gets one of the dreaded diseases like cancer or stroke, etc. or if the insured losses a vital part of his body like limbs, eyes, etc. (called Partial dismemberment).

Surrender value

Halfway through the policy, you might want to discontinue the policy and take whatever money is due to you. The amount the insurance company then pays is known as surrender value. The policy ceases to exist after this payment has been made.  Not all policies have surrender value.

Paid up value

If you discontinue paying the premiums, but do not withdraw the money or surrender the policy, the policy is referred to as paid up. The sum assured is reduced proportionately, depending on when you exit from the policy. You then get the amount at the end of the term.

Maturity benefit

The amount that the insurance company has to pay you when the policy term comes to an end is known as the maturity benefit. It generally comprises the sum assured + bonuses (guaranteed + non guaranteed).

Here is an example:

Age of policy holder, John 30 years

Beneficiary Spouse

Cover Rs 2 lakh

Term 20 years

Premium (per annum) Rs 9,000

Type of policy Endowment

If John passes away

He is insured for 20 years (between the age of 30 and 50). If he passes away during this time, his spouse gets the death benefit. This will be Rs 2 lakh (Rs 200,000) along with the bonus (if any) until the death occurred.

If John lives till his 51st birthday

He is entitled to the maturity benefit. This will be:

i. Sum assured: Rs 2 lakh (Rs 200,000). This amount is guaranteed.

ii. Guaranteed bonus: Please check with your insurance policy document for the actual amount. This amount is guaranteed.

iii. Reversionary bonuses: This is the amount which will be declared by the company every year based on its performance. It is considered only after the guaranteed bonus period, if any, is over. This amount is not guaranteed.  Once declared however, it becomes a guaranteed amount.  The payment would be given only during maturity or death.

A tentative break-up

Sum assured: Rs 200,000 + Guaranteed bonus: Rs 30,000 + Reversionary bonus: Rs 200,000

So at the end of 20 years, John gets back Rs 430,000.

Survival benefit

Some insurance policies make payments at specified intervals (before the policy term is over) to the customer. Typically, they are called money back policies.

The amounts paid are generally fixed and predetermined. They are called survival benefits.

Here is an example:

Age of David 30 years

Beneficiary Spouse

Cover Rs 2 lakh

Term 15 years

Premium (per annum) Rs 18,000

Type of policy Moneyback

The policy promises to give back a portion of the sum assured (10%, 15%, 20%, 25%) every three years.  This means David would receive

After three years: Rs 20,000

After six years: Rs 30,000

After nine years: Rs 40,000

After twelve years: Rs 50,000

If David passes away anytime in the 15 years, Rs 2 lakh (Rs 200,000) and bonuses (if any till then) will be paid to the spouse as the death benefit regardless of if the company has already paid him some of the money as promised above. For example, if David dies at the end of 10th year, he would have already received Rs 90,000 by that time.  But, this amount would NOT be deducted from the Sum Insured.

If he survives the 15 years, then What would David get on maturity, that is, at the end of 15 years?

He already received Rs 140,000 as can be seen above.  On maturity, he would get the remaining balance on sum assured (Rs 2 lacs – Rs 1.4 lacs = Rs 60,000) + Guaranteed bonus + Reversionary bonus.

A tentative break-up

Maturity Amount: Rs 60,000 (since balance has been paid over the years)

Guaranteed bonus: Rs 30,000

Reversionary bonus: Rs 125,000

So at the end of 20 years, he could get Rs 215,000 back

In sum, you get back Rs 355,000 (Rs 140,000 as survival benefits + Rs 215,000 as maturity benefits).

 

Hope you have already done your TAX planning for 2012 – 13.  If you need help,write us at kalyani@easyinsuranceindia.com

 

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