What if you were offered a BMW for the EMI of a mid-level sedan? Or, a big villa for the monthly pay-out of a not-so-big apartment? Or, life time protection, of say Rs 50 lakh, for a few thousand a year? While the first two may scenarios may always remain a dream, the third one exists in the real world. Term insurance offers you a large cover for a small amount per year. What’s the catch, you wonder? This is NOT some promotional offer that has an asterisk on top – that familiar star that has all those hidden clauses. What if we were to tell you that spending a few minutes to dispel simple myths on term insurance can help you decide on one of the best products you can opt for to ensure financial security for your family?
Here are some top misconceptions and myths about Term Insurance
1) An insurance policy that doesn’t return premium is not worth it – seriously, we advise you to think again. Really, you will be missing out the biggest security you can get in your life for a small cost (the cost a movie plus popcorn each month, that’s how little it can be). Life insurance term policies typically do not return premium paid. But, they come with this huge advantage of providing a very giant security umbrella for a low amount. Imagine, getting a Rs 50 lakh insurance cover at age 25 for just Rs 500 or so every month if you are a millennial. What’s more, some of these policies return premium if you opt for additional riders over the basic life insurance in your term policy.
2) All term insurance policies are the same, insurance companies don’t give claims – the value of insurance is when it is needed the most – at the time of the biggest crisis your family may face. What if your insurer decides to turn down the policy at the time of claim? This is where insurer pedigree, financial strength, the number of claims the insurer honours come into the picture. In insurance, all this goes by fancy jargon like ‘claim settlement ratio’, ‘solvency ratio’ etc. Insurance companies which rank higher on these ratios are the ones you should prefer. Insurance regulator IRDA releases these facts regularly. For instance, insurance companies in India are required to keep a solvency ratio of 1.5. To illustrate, LIC had a ratio of 1.54 in 2014, SBI Life a ratio of 2.28 and Bajaj Allianz a ratio of 7.34. Claim settlement of over 85% is considered good, that is, insurers settle over 85% of cases. LIC, SBI Life, HDFC Standard Life, ICICI Pru are some of the insurers with a settlement ratio of above 85% as per the IRDA report of 2015-16
3) I am too old; I am too young – is it ever too late to get healthy? Is it ever too early to build a healthy lifestyle? You know the answers, right? It applies to insurance as well. As we mentioned in one of our previous articles, the biggest flash sale for insurance happens when you are young i.e. you can lock in to a policy early on for dirt cheap rates. But, even as you get older, the rates for a term insurance policy are eminently affordable and the decision, eminently sensible. Consider this, even if you are 40, and still don’t have an insurance cover, you can opt for a Rs 50 lakh cover at around Rs 10,000 -12,000. Is it a bad deal to have your family covered for half a crore for the price of 10 movie outings a year?
4) Insurance is expensive, do you think I have money for a Rs 50 lakh cover!! – what if you are 25 and your family is assured of a safety net of Rs 50 lakh for Rs 4000 – Rs 5000 a year? Or, if you are 30, and you give your family an assurance of half a crore Rs 5000 – 6000? Expensive? Don’t think this needs any further argument in its favour. We will let it rest at this.
5) My office already has group insurance – hey, that’s great. You have a caring workplace. But, have you checked the amount? Insurance and financial advisors will tell you based on your current income about how much insurance you must have. Many offices provide some cover, but, more often than not, it is not enough. For just a few thousand more, you can ensure that you have enough insurance that is not subject to what your workplace has negotiated for hundreds of other employees – if you work in a large company. And, as we have mentioned before, the cost is just a few nights out. And, there could be periods when you might be shifting jobs; those time spans can leave you vulnerable if you do not have any insurance of your own.
6) I am growing my investments, so I don’t need insurance – that’s cool, you are smart. But, what if something were to happen to you before your SIP turns you into a millionaire? At its most basic level, insurance covers risk – the risk of something unfortunate happening to you and the risk of your family facing the consequences. Even as your wealth grows and you build assets as a safety net, a term insurance policy helps you keep all bases covered. Market cycles, poor investment decisions, unfortunate or extra-ordinary events can impact your wealth growth plan, not a locked-in term insurance policy. Make sure you literally have your bases ‘covered’.
7) Term Insurance cover cannot be increased – there’s good news, it can. If you took a cover based on your income when you were 25, some insurers offer you the option of increasing the amount once you make it big in the corporate rat race at age 35 or 40. For instance, SBI Life eShield & SBI Life eIncome Shield, Aegon Religare Life iTerm, Bajaj Allianz Term iSecure are some policies that offer this feature. So, you need not go in for a new term plan at that time. Of course, it will cost you more but not as much as some of your other passions at that age and level. And, nothing else will match the large safety net of an insurance cover calculated based on your current income and your family needs.
8) Policy cover needs to be maximum – not really. Many people think that one should opt for the max number of years for which a policy is available. It is absolutely fine if such an insurance cover is taken till age of the retirement. Typically, by retirement, most big expenses such as children’s education, home loan, car loan etc are paid off and many people have provided enough for their retirement in terms of provident fund or other long term savings.