September 26, 2006


Term Insurance in India

Standard Disclaimer: Insurance is the subject matter of solicitation. Consult your advisor. I don't own any responsibility ... yada yada...

This post is results of some gyaan acquired in last couple of years and some research done recently with regards to life insurance.

Q: Do I need life insurance?
A: Yes, if the financial equation of your family gets affected in your absence.

Q: How much insurance does one need?
A: Varies from person to person depending on assets and liabilities. Thumb rule is one needs cover of 5 to 8 times annual income. Most of the insurance companies have farily comprehensive insurance calculators on their websites. (This will give an idea how under-insured you are.)

Q: What is the most economical plan to get the required cover?
A: Term Insurance. This the plan in which you don't get your premium back at the end of the term.

Q: What about the traditional plans?
A: In recent years, the returns with those plans have come just to match inflation. So, in effect, you are getting exactly the money you invested without any returns. I feel bad when smart people employ wonderful tricks to save tax (eg paying rent to your nearest family member) and then go on invest that money in insurance plans which offer 5% pa return.

Q: Then, why not the "new age" Unit Linked Insurance Plans(ULIP)?
A: Multiple reasons. One, don't mix insurance and investment. Two, the exhorbitant cost structure. In the initial years, ULIPs charge as high as 30% of premium as some kind of fees. (In fact, major chunk of this cost is the comission given to the insurance agent. Don't be surprised if your advisor pushes for ULIP.) As all the costs are front-loaded, you stick with the same plan so that the cost is amortized over a long period of time. Basically, they have strong exit barriers.

Q: But, ULIPs offer tax breaks.
A: Never buy insurance for investment and tax breaks. There are tax-saving mutual funds(also known as ELSS funds) which also offer tax breaks. And these funds have performed well in recent times.

Q: ULIP Vs Term Insurance+ELSS. Which one is better?
A: Term Insurance + ELSS. One, low cost of ELSS mutual funds. Two, flexibility of investing whenever you wish instead of in one go for ULIP. Three, lock in period of ELSS is 3 yrs and that of ULIP is 5 yrs. And if you exit after 5 years, the cost incurred can be as high as 10% of annual premium. Third, in ULIP you are more concerned about total premium paid instead of ensuring if you are getting enough cover.

Q: My insurance advisor has shown that the ULIP from the company ABC has given 46% returns in last 3 years.
A: It is preposterous to extrapolate last 3 years' data to next 25 years. These years have given abnormally high returns to the investors. If you get 20% return over 15-20 years, safely assume that your fund manager is the next Warren Buffet or Peter Lynch.

Q: But, I don't have time to learn about mutual funds and term insurance.
A: How much time you spent choosing your last pair of jeans and t-shirt? How much time you spent in buying you vehicle or TV? Now, how much time you should spend before you commit Rs 30-40 Thousand PER YEAR for next 20 years?

Q: Where to find the returns of ELSS mutual fund?
A: ("Compare across Sub-Category"->Equity-ELSS) and Category->Equity-Tax planning)

Q: Which company offers the cheapest insurance
A: Here is premium comparison of various companies, in no particular order, for the 25-year term cover of Rs 10 Lac for a 26-year old, non-smoker male (As you have guessed correctly, that's me. On the wrong side of 26.). The premium is to be paid annually. Term insurance attracts service tax (current rate 12%). The column ST indicates whether the premium indicated includes service tax.
In general, premium goes up when the term is increases (Unlike other insurance plans where it is exactly opposite). Premium goes up if you smoke. If you start early, premium is the lower.

Company Annual Premium (Rs) ST Included? Maximum Term Other Features
ICICI Prudential 3055 Yes 30 Yrs
SBI Life 2280 No 25 Yrs Option of increasing cover at regular intervals.
Reliance Life 2460 Not mentioned 30 Yrs
LIC 3010 Not mentioned 25 Yrs Other plan offers term upto 35 yrs with minimum cover of Rs 25 Lacs
MetLife 2900 Not mentioned Not mentioned
HDFC Standard 2810 No. 30 Yrs
Max New York Life 2530 Not mentioned Upto age of 60 Yrs
Tata AIG 4080 No. Upto age of 60 Yrs

Update: This post was published twice due to a glitch. And I'm still not able to get the table formatting right.

Technorati Tags: India Cheapest Term Insurance Personal Finance

Good information buddy.
Thanks a lot!
Good starting point. But it would have been great if you could add the links of the source in the last column of the table so that somebody could check the details for the premuium for different age and for different amount for insurance. But anyhow, it is good to have this in mind when comparing the policies.
excellent simple language
Very good & Useful info.
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