This month,many tax-payers would be looking at various life
insurance plans for reducing their tax outgo. But before you zero-in on any plan,do your homework properly and ensure that you buy the right insurance product and the agent or the insurer does a proper need-analysis for you. Moreover,before you finalise a policy,do understand all the elements of the premium amount you would be paying. The first and the most important component of premium is mortality charges,or the charge that one has to pay for the risk cover. It is essentially the cost of the insurance cover,and the charge will vary with age,health,tenure,coverage amount and even the occupation of the life assured.
Most life insurance companies in India use the mortality table used by the countrys largest insurer,the state-owned Life Insurance Corporation of India. Needless to say,it is the countrys oldest life insurer and has data of mortality across various geographies in the country. The younger the person,the lower will be the mortality charges and it will increase as one grows old. So,it is always advisable to take a life cover at a younger age,ideally immediately after getting the first job so that you have to pay lower mortality charges on a life cover. Similarly,the younger you are,the lesser the chances of ailments. Again,because of this,your premium amount would be low. And longer the tenure,the lower would be the premium paid.
Also,there will be premium allocation charges,fund management charges and policy administration charge,especially on unit-linked insurance plans. Premium allocation charge is the percentage of the premium that will be deducted from the premium and would also include the agents commission. The insurance company will charge a fund management fees for making investment on your behalf and conducting research for investing in the best stocks for maximum returns.
The sector regulator,Insurance Regulatory and Development Authority (Irda),has capped the fund management fees at 150 basis points for policies with less than 10 years of maturity and 125 basis points for those above 10 years of maturity. Moreover,an insurance company will have certain overheads and administration costs and the policy administration charges would take care of these expenses.
Now,to take additional benefits,one can opt for riders by paying an extra charge. Riders are add-ons and give the policyholder the option to enhance risk cover. It can sometimes be customised according to one’s needs and can be bought in conjunction with the base policy at the time of the initial purchase. However,riders are optional and provide pure risk cover and do not have any investment or savings element to them. On a life insurance policy,the rider can be waiver of premium,guaranteed insurability,disability income,accidental and accelerated death benefit. The critical illness rider is important in life insurance as it covers heart attack,stroke,cancer and surgery. Typically,riders are bundled with the base policy and do not have any additional administrative charges. In fact,Irda has now capped that the maximum premium that is paid for riders,which cannot be more than 30% of the base policy cost. Thus,any benefit arising out of an individual rider cannot exceed the basic sum insured.
Policyholders can go for a critical illness rider where the sum insured is paid to the policyholder in case of critical ailment,such heart attack,renal failure and cancer. One must check the illnesses covered and the exclusions and be clear that critical illness benefit rider and a pure mediclaim policy are two separate covers. A critical illness rider enjoys tax benefit under Section 80D and proceeds received in the case of a claim are tax exempt under Section 10 (10D) of the Income Tax Act.
In fact,critical illness riders become more expensive with age as the probability of contracting a critical disease increases. Analysts say that in certain cases,the insurance company would refuse the rider coverage to the insured due to their health conditions at the time of entry and it is always better to buy the critical illness rider at a younger age. Another common rider which a policyholder can take is waiver of premium and it is most beneficial in child plans. In this policy,the insurer will waive all future premium without compromising on the benefits in case the policyholder does not have the financial capability to continuing paying.
The double sum insured rider,which is again mostly seen in child policies,benefits the policyholder in the case of death of the parent,where the sum insured is paid to the child or the guardian at the time of death of the parent and an additional sum insured is paid once the policy matures.
For linked-plans,a policyholder will have to pay switching charges if he wishes to re-balance the investment portfolio and switch from one fund to the other in the same policy. Insurers usually charge a flat amount for the switch. And of course,if you surrender your policy before the date of the maturity,the insurer will charge a surrender fee. In case of partial withdrawal of money from the policy,the insurer will charge a partial withdrawal charge.