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I want to take a term plan and need your guidance on the following:

Brief about me (it might be useful for you to evaluate my financial planning):

Family:
        I am 26 year old (male) unmarried. Planning to marry within a year or two and to have two children down the line. One child by the age of 30 and another one by the age of 33. :) My father is working in a private company and his age is 58. My mother is a homemaker and her age is 52.

My Salary:
        CTC: Rs. 30 lacs per annum
        In Hand: around Rs. 2,00,000 per month

Current and future liabilities:
        1.  Home Loan (for under-construction flat):
                 Loan Amount: Rs. 20 lacs
                 Tenure: 15 years (last EMI will be in 2029)
                 EMI: Rs. 20,000

        2.  Want to take another home loan for one more home (within a year):
                 Loan Amount (approx.): Rs. 80 lacs
                 Tenure: 15 or 20 years

Things I want to cover:
        Children education (primary, secondary and higher education)
        Children marriage
        Monthly expenses of around 50K per month

Queries regarding term plan:

  1. How much cover shall I take?
    • I was advised that the cover should be 10-20 times of your annual income. So it comes to around 3-6 crore.
  2. Whatever be the cover amount, Shall I take one policy of that whole amount or take multiple policies of small amount.
    • I was advised that the sum assured of a policy should not be more than 50-75 lacs as more the amount, more time it will take to process. Insurance companies generally pass small amount policy claims faster than big amount policy claim. So Is this correct?
  3. If the answer of the second question (above) is correct, then what shall be the maximum amount of each small policy? And shall I take those policies from the same company or different companies? And Are there any precautions I need to take when taking multiple term-insurance policies.
  4. If the answer of the second question (above) is correct, then shall I take all those multiple small policies at the same time and for same time frames or take difference policies at different times and for different time frames.
  5. How to decide on the insurance-company?
    • IRDA ratings include ratings for non-pure-term policies also?
    • I checked the premium amount on PolicyBazaar.com for Rs. 1 crore sum assured and the premium was in the range of Rs. 7K-32K from different companies which is a very large gap. So I am really confused. I don't want to pay high premium for the same sum-assured because of ignorance. But at the same time, I don't want to take a term-plan just because the premium is cheap and later on it will create problems in passing claims.
    • I was told that you can go with any company as long as you fill the form correctly and disclose all the medical details correctly. If this is the only thing to consider, then shall I go ahead with the company with cheapest premium. Or Are there any other metrics also to consider?
    • Shall I prefer govt. insurance companies over private insurance companies
    • Please suggest some good term-plan insurance companies
  6. Shall I take it online or offline?
    • I was advised that you should go for online as the premium is lower compare to the same offline-policy. Also in case of online, every condition is there in front of you but in case of offline, agent might cheat or hide some important conditions from you just to sell you a policy
  7. Will it be easier to get your claims passed, if the insurance company did your medical-checkup before giving you a policy because in that case company will not be able to reject your claim saying that the disease because of which the policy-holder died was already there at the time of taking the policy and you didn't disclose it in the form? If yes, then how to enforce the insurance company to get my health checkup done before giving me the policy. I don't mind paying for health-checkup.
  8. Shall I take riders / add on also? If yes, then which one and what all things I need to keep in mind before taking these?
  9. I heard of Home loan insurance. So as I am having home loan(s), shall I consider taking home-loan-insurance or increase the sum-assured of my term-plan?
  10. What if the company gets closed while my policy is active?
  11. Generally you get salary hike every year. So what to do for that because the Sum Assured is dependent on your salary and as the salary increases, ideally your Sum Assured should also be increased
    • If I should take more term-policies whenever my salary increases, I will end-up with hell lot of policies and my family will face lot of problems because then they will have to complete formalities for a lot of policies.
    • Or, shall I consider a policy which allows me to increase the sum-assured on the same policy by increasing premium. If yes, then I guess I will be left with very few insurance companies as very few companies provide that option.
  12. Is it correct?
    • Even if the claim is rejected by the insurance company, it has to pay the same amount from its pocket. Out of that amount, 80% goes to the IRDA and 20% goes to a NGO. The only benefit insurance company have in rejecting a policy is that it doesn't have to pay the re-insuance fees which is very minimal (e.g. 3K for 1crore policy). Re-insurance amount is the amount that insurance company pays to have insurance for large amount policies.

The whole idea is to take well-informed decision while taking the most important insurance as I don't want my family to suffer in future just because I made mistakes while taking the term-plan.

  • 3
    In future can you split your questions. Its more easy to answer and read – Dheer Jul 18 '14 at 7:46
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1 How much cover shall I take?

It varies and depends, it should be enough to cover the expenses your family would incur. A rule of thumb is it should be around 7 to 10 times your Gross. Again as you are not yet married, you can start with smaller cover and keep taking additional cover as you add more liabilities.

2 Shall I take one policy of that whole amount or take multiple policies of small amount.

It depends on convenience. Generally smaller claims are settled faster. However whenever you buy policy, most insurance companies ask details of previous policies. As mentioned earlier taking multiple policies over a period depending on need is better

3 & 4

See answers above

5 How to decide on the insurance-company?

Watch for

  • Claims Ratio: It gives the number of claims paid to Claims. i.e. if it is 98% it means of the 100 people who died and claimed, 98 were paid 2 were rejected on some grounds. It is mandatory for all companies to display it on website and yearly reports. Some companies have a claim ratio of 48%, it means only 48 people were paid of the 100 that died. Look for companies that have consistently high Claims Ratio. LIC is top. Other keep going up and down.
  • Claims Due Period: i.e. the time taken to process the claims. LIC although high the payments are slow. Some private companies it is much faster, ie around 80% in < 3 months

6 Shall I take it online or offline?

It is more of convenience. Generally its slightly cheaper as no agents are involved. Some companies do not have online facility.

7 Will it be easier to get your claims passed, if the insurance company did your medical-checkup

It depends on the insurers policy whether to have Medical done. IRDA has regulations in place that put the onus on insurance company to pass claims after 2 years and companies cannot hide behind medical after a specified period [Its currently 2 years].

8 Shall I take riders / add on also?

Its based on individual needs.

9 I heard of Home loan insurance.

This is a question in itself and answered somewhere on this site. Its a new product in India and the mortality / claims is not well understood by Insurance companies. i.e. there is not yet sufficient data. It works on reducing term cover matching the Loan outstanding. A better option is buy a term as it is cheaper and your liabilities keep increasing.

10 What if the company gets closed while my policy is active?

IRDA has guidelines. Most likely it would be bought by other company. There are norms on capital the company needs to have. It may delay things if you were to make a claim during that period.

11 Generally you get salary hike every year.

Read answers to 1. Insurance has to be determined based on need. You have to re-evaluate need every few years. Take additional insurance as needed every few years. You have to vary tenor and amounts accordingly. i.e. start with low insurance when you 20-30 yrs and it should be max around 40-50 yrs. Then less when you are around 55-60 yrs.

12 Is it correct?

Nope it is not. Re-Insurance is very different. Like you are minimizing your risk buy taking a policy. The insurance is company is minimizing its risk by buy an insurance from a Reinsurer.

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