Life insurance is one of the primary and essential requirements of ensuring a financially balanced and comfortable life for your loved ones. The capital benefits that come with life insurance help your family build a safe and safeguarded future, even in your absence. Moreover, under Section 80C and 10D of the Income Tax Act, there are income tax benefits on life insurance. Under section 80C, premiums that you pay towards a life insurance policy qualify for a deduction up to ₹1.5 lakh, while Section 10(10D) makes income on maturity tax-free if the premium is not more than 10% of the sum assured or the sum assured is at least 10 times the premium.
But if the sum assured is less than 10 times the premium – for instance you pay Rs.1 lakh as premium for a sum assured of Rs.5 lakh – you will get a deduction on the premium up to 10% of the sum assured. In the example, your deduction will be Rs.50,000 and not Rs.1 lakh.
Also, in case of death, the sum assured that’s paid to the nominee continues to be tax-free. But, on maturity, since the policy doesn’t meet the qualifying criterion for income tax benefit, the income will be taxed at the marginal tax rate.
As per Section 80C, the premium paid towards life insurance policies up to the maximum limit of Rs.1,50,000 is eligible for tax deduction and deductions are applicable if the amount of premium paid in a financial year is 20% of the sum assured amount of the policy. This is related only to the life insurance policies that have been issued before 31st March 2012.
For policies which were issued after 1st April 2012, the tax deductions are applicable of the amount of premium paid in a financial year is 10% of the sum assured.
Under section 80C(5) if the insurance policy holder voluntarily surrenders his policy or in case the policy is terminated before 2 years from the date of commencement of policy, then the insured will not receive any benefits on the premium paid, offered under section 80C of Income Tax Act.
Under Section 10(10D) of Income Tax Act, 196, the sum assured amount plus bonus (if any) paid on surrender or maturity of the policy or in case of death of the insured in entirely tax-free for the receiver. Some of the important points of section 10(10D) of tax deductions are:
Any amount payable to the insured under life insurance policies is applicable for tax deduction. The amount payable can maturity benefits and death benefits, allocated sum by way of bonus, surrender value and the survival benefit. Section 10(10D) deduction is also applicable to gains and proceeds from a ULIP and the benefit on maturity proceeds is offered when the premium paid towards the policy is not more than 10% of the sum assured amount.
Any maturity amount of life insurance policy or bonus amount received by the beneficiary of the policy in case of demise of the insured is totally exempted from tax deduction.
In fact, in order to ensure compliance, if the maturity proceeds exceed Rs.1 lakh, then a tax deduction at source (TDS) will apply and the insurer will deduct 1% as TDS (Tax Deducted at Source) if the PAN of the policyholder is available.
Life insurance companies rule the roost in the last few months of the tax saving season. The flavours of the season are traditional life insurance policies — endowments and money-back, for instance — with guarantees thrown in. In a falling interest rate scenario, such guarantee works as a bait to entice those looking at life insurance for tax benefits.
Guaranteed life insurance plans are the mainstay of almost all insurance companies. In such plans, instead of declaring bonus, which can vary depending on the profits that the insurers make, insurers declare a ‘guaranteed addition’ (GA) or ‘guaranteed return’ in lieu of bonus. On the face of it, such plans appear attractive with lots of guarantees thrown in at different stages of the policy. After all, the maturity amount is guaranteed and so are the monthly payouts.
What are the guarantees?
Do not be surprised if such plans boast of guaranteed addition of 7-9 per cent of premium per annum or guaranteed payouts of 126-138 per cent of the annual premium each year. Looking at these figures, who would not fall for such guarantees?
What are the actual returns?
The guaranteed addition is not equivalent to the actual annualised return. These guaranteed benefits accrue only on maturity and hence the actual return will not be what is perceived or told to the customer. Guarantee always comes at a cost, therefore, the returns, after adjusting for the costs because of the guarantee, are low in such plans.
Although actual returns would depend on one’s age, term and premium amount, the average IRR (internal rate of return) in most traditional plans, including money-back, endowments, lie between 4 and 6 per cent per annum. The plans with guarantees would carry even lower returns.
Let’s see how a typical guaranteed plan works. Assuming there’s a guaranteed plan for a 10-year term, but with a premium paying eight-year term. The plan offers guaranteed payout of 150 per cent of premium every year after maturity of 8 years.
It means that the premium is to be paid for 8 years, but life cover will run for 10 years. After maturity, payouts will happen for the next 8 years. Illustratively, if the premium is Rs 20,000, it has to be paid for the initial 8 years. Thereafter, from 10th till the 17th year, there will be annual payout of Rs 30,000. The IRR in the above plan comes to 2.9 per cent per annum!
Types of guarantees
The structure of the guaranteed plans is not the same across insurers. Some may offer a guaranteed return based on the premium, while others on the sum assured. The guarantee may also differ based on the term of the policy or even the premium paying term. Also, in some plans, the guaranteed returns get added to the policy from the second year onwards, while in some, it may start at a later date.
Some of these plans are similar to money-back plans wherein there is regular flow of income at regular intervals, while in some, there could be a lump sum payment on maturity. Further, in a few of them, payouts happen after maturity for a certain number of years.
Guaranteed traditional plans gets complex
The sales pitch could be anything, but hidden beneath the complex wordings of insurance plans is the payout structure. The traditional life insurance, representing the endowments and the money-back kind of policies, has undergone a sea change. The terms and conditions of the payout are so convoluted that comprehending it may not be an easy task for many.
Sample this: The premium, for a specific age and sum assured (SA), is paid for a limited period (say, 5 years) while the term of the plan is 15 years. Based on the above parameters, the insurer will calculate a guaranteed maturity value and depending on that, will start paying a certain percentage of it as guaranteed cash amount starting the non-premium payment period (from the 6th year) till the end of the term.
Similarly, there could be a guaranteed plan in which every 5th year, 125 per cent of premium is paid out, while the GA is added to policy each year, to be had on maturity along with SA (less amount paid every fifth year). In few other guarantee plans, the payout could be entirely on maturity, including GA and SA.
Unlike in the past when they were simple and straightforward to understand, the newer versions have lots of twists and turns in them. With guarantees thrown in, such plans may appear attractive, but the actual return in them is around 5 per cent per annum, or even lower.
Buying life insurance merely to save tax could be financially damaging. Traditional plans are inflexible and lock in funds for 15-30 years with a return of 5 per cent. Stay away from traditional insurance plans, with or without the inbuilt guarantees. Rather, meet your protection need through a pure term insurance plan and park your savings in Public Provident Fund (PPF) or Equity Linked Savings Scheme (ELSS) for meeting long-term goals, while keeping the tax liability at bay.
When it comes to the insurance industry, change is the only constant, says Anup Rau, MD & CEO of Future Generali India Insurance
In chaos theory, the butterfly effect is the idea that small things can have a non-linear impact on a complex system. The flapping of a butterfly’s wings in the Amazonian jungle, for instance, could create tiny changes in the atmosphere that lead to a tornado in Texas. Just like the minuscule yet deadly novel coronavirus in 2019 triggered a storm of changes that swept across all sectors in the world, including the insurance industry.
Analysing risks and planning for a crisis is what the insurance business is about. While the pandemic has wreaked havoc on the industry, it has done better than most other. The industry has changed structurally, mostly for the better. The changes, forced into the industry in a tearing hurry, have proved to be sticky and durable. And whether intended on not, have put the customer firmly at the centre. Let’s dive in.
Consider this: India has 1.18 billion mobile connections, 700 million Internet users, 600 million smartphones, and a population that has the highest data consumption in the world—about 12 GB per person a month (National Health Authority of India, 2021). Today, being digitally versatile is central to every decision and every interaction made by both individuals and companies. The insurance industry was among the first to recognise this and made the best possible use of technology, investing early in collaborative tools like social media, WhatsApp, Zoom, Microsoft Teams, and so on—as well as digital technology assets such as mobile apps for insurance, chatbots, and tools that allow processes like faster KYC verification and onboarding, automated underwriting, virtual claims adjusting, and so on. Digital technology that is cheap, scalable, functional, and replicable is here to stay.
Choice is nice
A marked increase in awareness about health during the pandemic has resulted in an uptick in demand for health insurance. But the ‘one-size-fits-all’ approach is a thing of the past. With a plethora of choices and a greater appreciation for the gift of health, people are taking a more holistic approach to their health. This means customers today demand customised, personalised, and intuitive policies that were not covered by companies earlier. For example, policies specially designed for Covid-19, mental health issues, certain types of cancer, seasonal illnesses such as dengue, malaria, or even a cover for those with ‘adverse’ medical history who were denied cover earlier. As customer demands and expectations continue to change, insurers will have to find a way to adapt their business model to meet new demands and win trust.
Innovate or perish
During the pandemic, the changing consumer behaviour spurred companies to reimagine and build new product strategies to offer relevant products that sustain customer interest. This is a trend that will continue for the foreseeable future and companies that adopt a mix of hyper-segmentation and innovation are the ones that will emerge stronger than others.
For instance, an innovative cyber insurance product, especially now, due to the increased risk of vulnerability, cyberattacks, data and identity theft. Companies will target newer age groups, such as millennials and gen Z, who traditionally tend to underestimate the importance of health insurance. Innovative products in insurance are not restricted to just health either. Hourly car insurance, women-only driver’s insurance that rewards good drivers with lower premiums, pet insurance, trip delay or cancellation insurance just for honeymoons (anyone who tied the knot during the pandemic will vouch for the need for this)—innovation is the mantra for success.
During the pandemic, like the rest of the world, the insurance industry too adopted the work-from-home model. However, remote working comes with challenges, such as a fragmented workforce, the blurred lines between working and personal hours, mental fatigue, and the challenge of building a cohesive organisational culture with a distributed workforce. Hybrid work culture is the future. Make no mistake, there is no going back to a 9 AM to 6 PM, five-days-a-week workplace.
While the physical demands of travel to the office and other locations and cities have diminished, the demands on the employee’s time have increased and will continue to stay elevated. Or worse, in most cases, employees have to fend for themselves and take responsibility for their sanity and well-being. Distance between the organisation and employees, and between employees themselves, could lead to the serious consequence of the company distancing itself from the customers. Of all the changes, this is the most significant and impactful one. How this is dealt with will have the biggest bearing on the future and success of an organisation.
“The secret of change is to focus all of your energy, not on fighting the old, but on building the new,” said Socrates. How we build the new will separate the wheat from the chaff and the winners from the also-rans.The next five years promise plenty of drama and upheaval. Let’s grab the best seats in the house and enjoy the show.
The author is the Managing Director & CEO of Future Generali India Insurance.
A life insurance audit, however, is a comprehensive study of your existing coverage to make sure it still fits your needs.
Back in your parents’ or grandparents’ day, they might have purchased a life insurance policy, put it in a file and only thought about it when the bill came for the annual premium or when the insured passed away. And that was usually fine. Today, however, policies are a more complicated financial tool that needs to be monitored — much the same as any other assets you hold in your portfolio. The goal is for your life insurance policy to be there for your beneficiaries when they need it most. That is not the time you want them to be surprised, so it’s vital to perform a policy audit on an annual basis and take any corrective action that is necessary.
The audit itself is about more than just the policy. This is an annual opportunity to review your plan and identify any gaps in your coverage resulting from any occurrences from the previous year. It allows you to address any lifestyle changes and answer such questions as:
• Is the policy’s original goal still valid?
• What type of policy do you have?
• Are the original beneficiaries still valid?
• Is the ownership structure of the policy still correct?
• Are there any health issues that could have an effect on your policy?
• Do you still need the life insurance policy?
• Do you need to request or review any recommendations from your insurance advisor?
In order to accurately evaluate your policies, you will need to obtain specific information. The audit will depend on the amount — as well as the quality — of the information received. You should have the original policy and illustrations, the most recent annual statement and a current in-force illustration. Provide these to your advisor, and they will review the information gathered and advise you on any gaps in your plan. The audit is done so you can ensure that all of your plans and wishes for your family and estate are being met.
In addition to looking at your policies, this is also a good time to review the performance and financial health of your carrier. This is a crucial step in your audit. Not every insurance company is on equal footing. Your advisor needs to evaluate the financial stability of the company, as well as its ability to pay any future claims, plus its overall investment portfolio and how the company is rated compared to other carriers. The main goal is to make sure your carrier can meet its future obligations.
After the audit is complete, your advisor should be able to provide you with a clear picture of your current coverage and any shortfalls in your plan. If there are any gaps, your advisor should provide you with recommendations to rectify the situation. If it turns out that after the audit that you remain properly covered, then it is time well spent to ensure your peace of mind.
There are many things that we do automatically each year to ensure the safety of our families: regular maintenance on our cars, changing batteries in smoke detectors, etc. We do this to provide safety and wellbeing for our loved ones. Don’t they also deserve the same commitment for their financial future? One afternoon each year with your advisor will provide your family with the financial protection they deserve.
The large sums of money involved in these life insurance policy frauds are one of the main reasons why they occur so frequently. Money is the primary motivator for any type of fraud, and life insurance fraud is one of the most widespread.
Another factor is that most consumers are unaware of how life insurance products function. They are vulnerable to fraudsters because of their ignorance.
You can be taken advantage of in a variety of ways. Here are some of the most typical life insurance scams so you can recognize when something isn’t quite right.
1. Theft of Identity
This is the most popular fraud. Identity theft occurs when a person obtains your personal information from you wrongfully and uses it for economic gain. Over the years, this type of life insurance scam has significantly increased due to the internet. As technology has advanced, more and more work is being done by just talking over the phone or the internet. This enables the fraud to commit more crimes.
Many scammers lure you via e-mails, phone calls, SMS will pose as agents and ask you for your personal information. They can contact you saying to buy a new policy or your existing policy needs some changes. The information asked from you can include the following.
a) Credit card information
b) Aadhar card number
c) Bank account number
All these are taken by the scammers as a form of information needed to apply for a life insurance policy but then are misused against you for money.
2. Fraudulent Company/Insurer
You may have heard in the news about the companies that didn’t have any existence taking advantage of people. Yes, this thing does happen. Some high-profile frauds research well and set up their own fake insurance companies.
These companies make they’re at a cost that is considerably lower than what the other legitimate companies are offering so that customers are attracted to them. Also, they can offer services such as easy sign-up, quicker response.
All they require is for you to enter your card details. As soon as they start getting customers and when the customers enter their details to get insurance the fraudsters run away with the money. Always make sure of the company before buying.
Not only the company but sometimes insurers are also frauds. They may present you papers that are real and take premiums from you as well, but they will not transfer it to the policy and instead keep it with themselves. This will lead to the company cancelling your policy even though you are paying premiums.
Churning is the act of replacing the policy which is already in force with a new policy by the agent, to earn more commission. This is also referred to as ‘Twisting’.
How does Churning Work?
In churning, an insurance agent will try to replace your existing policy with a new policy price of which is either same or a bit higher. He will try to do this without involving you as the policy structure is somewhat the same. This is done so that the agent can get an extra commission for the new policy he replaced with your existing one.
Churning to add to your commission is illegal and is a big fraud in India as well as many other countries. Agents must take the customer’s consent before making any alteration, modification to the policy.
4. Claims Fraud
You must have seen in many movies that how people orchestrate their or even their loved one’s death to get hold of the insurance money. While this happens in real life as well.
Faking or staging death to claim the insurance money is what claims fraud is all about. Many people fake their death or their family members to claim the life insurance policy death benefit. Fraudster fakes their death and disappear and return after some years.
Some famous life insurance fraud examples include one of the British ministers, John Stonehouse. The minister went missing from Miami and was later found in Australia with a different identity. He was later found guilty and was imprisoned for 7 years for fraud.
Some people even go to the extent of killing their loved ones to get the policy’s benefit. Though sounds gross, but it does happen in some cases.
These were the most common scams under life insurance. Staying aware of the working of life insurance policy and knowing what you are getting into is very important. Some steps you can take to stay safe from these scams are as follows.
a) Check that the company you buy insurance from is trusted. Do not buy from the source you have not heard about and cannot be easily found.
b) Do not reply to unsolicited e-mails. If you receive an e-mail, call asking about your information then do not provide them unless you are sure of it. Check with the company’s helpline if they require such information or not.
c) Always read the terms and conditions associated with a life insurance policy thoroughly. Keep checking on the policy regularly.
d) Check with the company immediately if the agent asks you to pay more premium without any reason.
e) Always disclose full information to the insurer. Do not indulge in any unscrupulous activity yourself too. Getting caught can lead to a heavy fine and even jail.
5. False information
This case happens not at the insurer’s end but at the insured end. This happens when wrong information is entered into the application. This is also called misrepresentation or concealment of facts. This is one of the most common frauds.
Before buying a life insurance policy, you are required to enter details, regarding your basic information. This may also involve your medical details. Hiding any important information or misrepresenting information counts as fraud in this case.
For example, not disclosing some medical condition you may have. Another example is not disclosing you are a smoker, despite being one. To cater to this fraud companies, have medical tests. If the information doesn’t match the medicals, then the policy is rescinded immediately.
If you have a problem or you sense that you have been cheated, contact the insurer. If there is no response then immediately contact IRDAI’s grievance cell.
On the surface, a Life Insurance seems quite straightforward. An insurance company will receive premiums from the policyholder and in exchange, they will choose to pay out a death benefit to the policyholder’s beneficiaries. However, most life insurance plans can be a lot more complex than this. People fail to realise that there are a lot more options and types of life insurance policies out there that have perks and can be used to one’s advantage.
Here are a few things you didn’t know about Life Insurance:
1. Income source in your time of need
A policyholder need not have to pass away to receive their death benefit early from their Life Insurance policy. In fact, this is a common life insurance myth. The fact is that many plans offer critical illness riders that can pay out funds in case someone were to become disabled, experience a heart attack, suffer from an invasive form of cancer, stroke, or more such things. Hence, Life Insurance plans can provide an important safety net for those who are unable to work or have mounting medical bills. For these reasons, it is recommended that one use these funds while a person is alive, rather than using them solely as a death benefit.
2. A personal pension plan
Some financial advisors recommend that one can treat a Life Insurance as one’s own personal pension plan. In fact, there exist many retirement-oriented Life Insurance plans. These are pension plans, ULIPs, endowment plans etc. To add to this, Life Insurance is very tax-friendly in India, making it an attractive means of lowering one’s tax burden, both prior to and during one’s retirement.
3. Waiver premiums by adding a rider
Did you know that you have the option of premium waive riders that come with multiple policies? It is these provisions that often help those who are disabled keep their coverage, without continuing to pay premiums. As suggested in the name itself, this kind of rider eliminates the need to pay premiums for those who have a qualifying illness or injury. Similar to living benefits afforded to policyholders by some Life Insurance policies, premium waivers are rarely utilised but are incredibly useful.
4. Maturity Payout
One of the biggest Life Insurance myths is that the company will not return your premiums if you survive your policy’s term. This may be true for some policies but not all. In fact, you can opt for the return of all your premiums if you reach the Life Insurance policy’s end and never make a claim. You will be required to pay extra money for the return of your premium rider. However, without being aware of this feature, some people may let go of all of their invested premiums when they could have had it returned to them. Many policies naturally offer a maturity payout in the form of the Sum Assured which is secured to the policyholder, if they survive the policy term.
5. Can be utilised as collateral
A Life Insurance fun fact that you probably weren’t aware of, is that depending upon the policy, one can use their Life Insurance as a collateral to secure a loan. Besides term insurance plans, this feature tends to apply to all other Life Insurance plans. To explain this simply, a plan that comes with a maturity benefit can also be used as a collateral if one wishes to borrow funds, thereby offering you financial flexibility when you are in need of it the most. Hence, if you are desperately seeking to take a loan, you can use your Sum Assured as a collateral for the same.
6. Tax-Free Source of Income
A whole Life Insurance plan that builds up a cash value over a time period can serve as a tax-favored repository of funds that can be utilised by you in your time of need. This cash value can be used for nearly any financial requirement you might have, whether it is to fund your children’s education or to pay for a vacation. This cash value is also completely tax-free since it is not considered to be a profit.
The truth about Life Insurance is that it is more than just a financial security for your loved ones, in case you are not around. This Life Insurance myth needs to be busted so more people can discover Life Insurance plans worth putting their money into. Some other Life Insurance fun facts are that it can serve as a loan collateral, become a tax-free income source and aid your retirement goals. You also have the flexibility to waive off your premiums in case of an accidental disability or illness.
As we inch closer to the new year, forming resolutions becomes imperative in order to set goals for the forthcoming year. Setting a budget, getting finances in check and carefully analysing your savings and investments comprise a key part of the financial aspect of resolutions. However, there are multiple other factors that are kept in mind while making that decision. There are multiple methods and practices along with financial tools that one can use to plan finances carefully and ensure a level of financial wellness.
The Guide to Financial Planning this New Year
December is the time everyone starts setting resolutions for themselves and before the new year arrives, here are a few easy-to-implement ways in which you can plan your finances for the coming year:
Budgeting: The Foundation of Financial Planning
Almost all financial planning depends majorly on having a budget and following it diligently. It is important to analyse past income sources, expenditure, investments and savings to get a clear picture of your financial standing and then plan accordingly how you want to spend, save and invest your future income.
A fixed budget puts a healthy constraint on your expenditure as well as gives you a number that you should ideally aim to save. Adopting the 50-20-30 rule, as mentioned in the famous book All Your Worth: Ultimate Lifetime Money Plan” by Elizabeth Warren, could be a great way to start as it allows you to have a better, more crisp idea of how to spend your money while also saving a particular amount.
Monthly Savings: Your ‘Rainy Day’ Saviour
When setting up a budget, it is imperative that you set an amount aside as savings or “rainy day fund”. A financial resolution that you should strive to include in your list of resolutions is to either save an amount of money every month or have a bigger goal and amount for the end of the month.
A few ways you can save more are by sorting priorities, differentiating between essentials and non-essentials, setting up fixed or recurring deposits with a bank, etc.
Building an Investment Portfolio: Your Retirement Companion
Investments assure present and future financial safety. They enable you to increase your wealth while also generating inflation-beating returns.
After you have a fixed plan for savings, the next important step is to figure out how and where to invest. Investing instills financial discipline by establishing a habit of getting away a specific amount each month or year for your investments.
In today’s day and age, when everything is available at your finger steps, people don’t realize how vastly their spending capacity has increased. The use of mobile apps and mobile-based payments have made it easier for consumers to get things done quickly, and that has changed the way a transaction is perceived now in comparison to earlier. Preferring food delivery overcooking, multiple streaming platform subscriptions, etc are now opted more by the millennial generation.
This in turn has given rise to a lot of expenditure that is non-necessary and can be avoided very easily. Expenditure control can help increase savings and allow more assets to be invested, as the more you save, the more you can invest.
Insurance: Your Safety Net
Insurance is essentially a financial safety net that you can rely on in times of distress. It is an extremely important and valuable financial tool. Purchasing insurance is critical because it ensures that you are financially secure in the event of a life crisis, which is why insurance is such a vital aspect of financial planning.
It not only allows financial security but also reduces stress at a later stage in life, especially when things would go south. A prime example of this was the pandemic when an unprecedented crisis struck the world, and it got extremely difficult to manage finances with the increasing costs of medical expenses and aftercare. The peace of mind that insurance provided to people in such a time is also what makes it a widely appreciated policy.
These are the most common ways in which you can plan your finances for the upcoming year. Since these methods are evergreen, they are sure to work perennially and also across the years.
Having said that, it’s important to take these methods seriously, as most people are aware of them but tend to overlook them.
Another critical point to keep in mind is to set realistic goals and aspirations to not overburden yourself and keep things going smoothly.
These are a few ways you can ensure your financial wellness, but it is essential to keep in mind that it is a step-by-step process that you need to take one day at a time.
You may weave countless financial goals in your lifetime. Then work out the math to build financial strategies around them. But life itself is unpredictable. An untimely death can not only jeopardize these goals but can leave your family high and dry.
In such difficult times, though no amount of money can replace the absence of a dear one, term life insurance financially protects your family in your absence.
1. Term Insurance Plans are very simple to understand
Simplicity is one of the reasons for the growing popularity of term insurance. Term life insurance is a pure life cover that focuses on offering your dependents the sum assured in case you were to die. All you need to ensure that the premium is paid on time.
2. Term insurance plans are supremely affordable
The premium for a term life insurance plan is as low as 0.1 percent of the total sum insured. Now consider this, we pay about 2 percent of the car’s present value as its premium. Moreover, online channels like ETMONEY provide an extra discount on your term insurance premiums as compared to offline channels.
3. Term Plans offer much higher coverage compared to traditional plans
The total sum insured for traditional, ULIP, or endowment policies is about 7 to 10 percent of the yearly premium. So for example, if you buy one of the plans mentioned above for a yearly premium of Rs 20,000, you get a coverage of Rs 2 lakh which will barely cover your family’s expenses for a few months.
Meanwhile, a term plan offers a much higher sum assured so that you can leave your family and dependents enough money that they don’t go through financial hardship in your absence. An average sum assured for a term life insurance policy is a little over Rs 1 crore which will cost you somewhere in the Rs 10,000 to Rs.17,00 range. That is, the coverage provided by term insurance is about 60 times higher as compared to traditional, ULIP, or endowment policies.
4. Term plans come with a host of tax benefits
While the primary reason for buying term insurance is securing your family’s future, you also get to save tax with them. Let’s look at its 3 term life insurance tax benefits.
Section 80C: Under this section, you can claim a deduction up to Rs 1.5 for certain investments and purchases, which includes the premium amount you pay towards the term life insurance plan.
Section 80D: This exemption is allowed on the premium paid towards health-related coverage like critical illness riders. You can claim deductions up to Rs 25,000 for the premium paid towards it.
Section 10 (10D): In the case of term life insurance, this benefit can be claimed while claiming the payout. The entire amount is completely exempt from taxes.
5. Premiums are locked for the duration of the plan
When you purchase a term insurance plan, you are effectively locking the premium you will be paying this year, next year, and every other year till the end of the plan. And this is where it becomes highly beneficial for you if you start your term plan as early as possible when premiums are lower at the younger ages.
Let’s illustrate this with an example. So if you are buying a term plan (let’s consider that the coverage is Rs 1 crore till the age of 75) at the age of 30, you would pay a premium of about Rs 10,000 every year.
That is, you would pay Rs 4.5 lakh in total. But, if you buy the same plan at 45, you would be paying a yearly premium of around Rs 30,000 The amount you pay toward the term plan in the next 30 years would be Rs 9 lakh.
As discussed in the article, term life insurance has several benefits. It provides higher coverage for a lower premium, it’s simple to understand, and comes with immense tax benefits. But before factoring in all the benefits, you should remember the core objective of insurance is protection and not savings.
Unlike most life insurance products, term insurance remains true to this objective.
Term insurance policy premiums are set to hike anywhere between 25 percent to 40 percent as reinsurers tightened underwriting norms in the wake of the Covid-19 pandemic. The extent of the premium hike will, however, vary from one insurer to another. The new rates will come into effect from December.
Covid-19 death claims in Q1 were higher than the cumulative claims in the entire FY21. As per the report, post pandemic’s second wave, Life insurers have so far shelled out Rs 11,060.5 crore to settle Covid-related death claims.
As of October 21, life insurers settled a little over 130,000 Covid-19-related death claims. About 140,000 Covid-related claims have been made so far, amounting to Rs 12,948.98 crore, of which 93.57 percent by volume and 85.42 percent by value were settled, a Business Standard report stated.
Following the claims burden, Munich Re, the largest reinsurer for the Indian insurance market, is set to hike its rates for underwriting portfolios of pure protection plans by up to 40 percent.
Effect of a surge in claims post Covid-19 second wave
The worsening mortality experience for life insurers in the country accentuated by the pandemic has prompted reinsurers to re-evaluate their prices on term plans. Munich Re has intimated to insurance companies, whose risks it is covering, about a price hike.
The global reinsurer has communicated its decision about increasing rates, according to a senior executive of a private life insurance company.
About 8-10 insurance companies have been informed about the move, sources told Business Standard.
As Reinsurance rates hiked by up to 40% and Premiums are likely to increase by 30%, depending on age, sum assured and quality of life of the individual.
“The reinsurer has increased its rates for term policies by 30 to 40 percent across various companies. This will lead to an increase in the premium rates by 25-30 percent,” an executive said.
Apart from increasing reinsurance rates, the German multinational insurance company has also tightened underwriting standards.
This is the second time reinsurance rates have been hiked in 2021.07-Oct-2021. In March, the rates were raised by 4-5 percent. In June last year, there was a steep hike of 20-25 percent.
Life insurance companies in India have received four to five times Covid-related death claims in FY 2021 as compared to the last fiscal year, which has resulted in huge losses for them. Following this, Insurance firms are engaged in discussions with the reinsurer on the quantum of the hike.
Got a term plan for your family? Or maybe you’re planning to take the term plan in a few days.
If you are, good for you! One of the biggest questions, every person considering term insurance has, is – “Should I take the cover for the maximum period?”.
We provides coverage up to 85 years of age. or 20 25 30 35 40 years. I am confused about which policy term is better to get maximum benefits?
Just like him, hundreds of investors have asked me this question over and over again, and I tell them, “Just take it only until you reach 60 years of age.”
And they happily ignore my suggestion; as if I am crazy, suggesting this to them. The “Insurance only till 60 years” looks kooky to them – kind of a “wrong deal” and they want to get “maximum benefit” out of the term plan.
“The chances of my family receiving the claim amount is higher when I am covered for long” is the common thought process of every person who is in the mad rush of buying the highest possible tenure.
Trust me, that’s flawed thinking and I will explain why today. More than a sermon, think of this article as a discussion, where I put some points in front of you and you reflect and ask yourself – “Does it make sense? or not?” and then make your own decision. So here are those 5 reasons– why you should not take Insurance till the age of 85 years or more
1. You don’t need it beyond your working life
You need to ask yourself the question – “Why am I taking Life Insurance?” and the answer is – “Because right now, I don’t have enough net worth, which will help my family if I am gone” or in other words – “Because my family is financially dependent on me.”
For a person who is not earning and does not bring money home, his death will cause family only emotional loss; not financial loss. Hence, logically you need to cover yourself through a life insurance product, only for the time you are working and others are financially dependent on you.
2. You will have “probably” have enough wealth by the time you retire anyway
Stretching the 1st point, if you are taking life insurance cover until you are 75-85 years, will you need it at that time? Do you feel that you will have any reason to have a cover of 1 crore that time (after 30-40 years)? I am sure (more confident than you), that you would have completed all your financial goals by that time, you will have your own home by that time and you will have done everything in your life by that time.
Your focus area at that old age will be very different than what you focus on right now.
To understand this point, you have to stop for a moment and go into 2040-50; when you are retired and close to heaven’s door.
Are your children financially dependent on your income – which does not exist? Is your spouse depend on your income? You must have already accumulated enough wealth by that time and you must be getting some income out of that.
Your death has nothing to do with family cash flows at the time.
3. The premium factors in your tenure already
Most of the people who feel that they are smart enough to take a term plan till 85 years, forget that on the other side is a professional business running for decades now.
They have hired people who are 10 times smarter, who design products (they are called Actuaries) that generate large profits for companies and not investors. Life Insurance is a “for-profit” business. They design things so that they earn profit.
If a company allows you to make a plan that lasts until you turn 85, why have they done that? Why did they allow that to happen? The premiums they charge already factor in everything. You pay premiums to get that term plan, it does not come free!
4. The value of your sum assured is peanuts later
I hear it most of the time – “I am taking the term plan till 85 years so that even if I die, my family will get the money. So, the higher the tenure, the higher the chances of making money.”
But they forget that by doing so, they are helping the insurance guys make a profit, but let’s say you die at 70 years. Celebrations! Your family will get that 1 crore, which at this moment sounds good, but will not be worth a lot that time.
Let me show you the mirror that lets you look into the future
Let’s say you are a 30-year-old guy, and your monthly expenses are 40k per month. You say to yourself, “Let me take that term plan worth 1 crore so that in case, I die my family can get 1 crore which will provide them some good monthly income.”
It would be a very good number if you die early in your life! With each passing year that 1 crore will be worthless. If you die the next year of taking the term plan, the worth of that 1 crore is pretty much the same, 1 crore.
But if you die after 10 yrs, that 1 crore will be worth 50 lacs in today’s world. So, getting 1 crore after 10 yrs is the same as getting 50 lacs right now. Are you getting my point? The money you get in the term plan is a constant number, not linked to inflation!
So, imagine you have taken the term plan till 85 years and you die at 70 (after 40 yrs of taking the term plan),
what is the worth of that same 1 crore at that time? Hold your breath! It’ll not more than 6-7 lacs assuming an inflation of 7% and even if inflation for the next 40 yrs is a small 5%, it would not be worth 15 lacs today! So, when your family gets that 1 crore after 40 yrs, it’s kind of worthless.
No one would be depending on that money anyway; it’s just a bonus on your children’s inheritance money!
Act like a real informed and smart investor
I have been seeing this madness for many months now and was constantly wondering why people are focusing so much on this small thing called “long tenure” in the term plan.
I see investors abandoning one insurance company for another just because the other company is offering a term plan for 75 years.
You are allowing yourself to fall into a trap if you do this. If you have already taken the term plan for 85 years, do not worry … do not cancel it, just let it run its course.
Stop paying premiums when you feel that your family can be taken care of, by the wealth you have generated.
If you are planning to take a term plan right now, take it for as long as it takes you to retire, probably till 55 to 60 years, but not beyond that.
Would be happy to hear your thoughts and your views on this topic! You have taken the term plan for very high tenure.
Deeva Ventures, originally established in 2008 as Deeva Agencies, is a top-notch financial company offering a wide range of financial products and delivering tailor made financial services. At Deeva, we believe developing a plan with a professional advisor is one of the most powerful steps you can take in life. Read More…