Download Beshak Term Insurance

THE RIDICULOUSLY
SIMPLE GUIDE TO
TERM INSURANCE
Version 1.1 | September 23, 2020
Copyright © 2020 by Beshak.org
All rights reserved
List of updates since Version 1.0 (September 18, 2020)
Page 17 - Table updated with additional data for age of death 99 years
Page 21 - High risk investments such as stocks"'has been changed to
'High risk investments such as equity stock options'.
Page 29 - The table for limited pay updated to the latest premium grid
Page 38 - Updating the the rights of the nominee in light of Insurance
Laws (Amendment) Act 2015.
No part of this publication text may be printed, distributed, uploaded or posted
online without the prior written permission of the publisher.
For permission requests write to the publisher at
[email protected]
Thank you!
We would like to thank Gopal (Mr. K. S. Gopalakrishnan),
one of the most respected leaders in the life insurance
industry in India, for helping us strategise and guiding us
at every step of the way.
Your contributions have made this eBook way more
valuable than we could have ever imagined!
Gopal is an experienced Actuary and former CEO of Aegon Life Insurance
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Page Jumper
This will be a long read, we admit. But, every single page is packed with useful
insights that will get you closer to an actual decision. For a deep-dive read the
entire book (60 minutes) . If you're looking for specific answers though, feel free
to jump right to the topic.
Tap on the page number below to go straight to a topic. Use
07
11
15
19
25
35
40
45
Understanding
Term Insurance
Choosing the
right duration
Customising your
policy
Frequently asked
questions
46
Final word
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to return to this page
When is the right
time to buy?
How much cover
do you need?
Important things
you should know
The 8
Commandments
of Term Insurance
Opening
Who are
Salvo
we?
Who are we?
Beshak is a research platform for users seeking informed guidance on all
things insurance. We believe that every person has the right to all the
information they need to make insurance decisions, with confidence.
Conceptualised by industry experts with several decades of diverse
experience, Beshak is a repository of useful content, guides, tips and
calculators that simplify the often complex insurance journey.
As an independent research organization we aim to make insurance
products ‘understandable’ to the individual customer, while
simultaneously helping insurance companies improve solutions in line
with their customers’ evolving needs.
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Who is this ebook for?
Who is this
ebook for?
You'll only buy term insurance once
(or maximum twice) in your lifetime.
It is super important for your family,
and you want to get it right.
There are many questions in your
mind, and way too many answers
out there, that will leave you
confused. In fact, according to a
recent Beshak survey, 35% of the
respondents admitted to purchasing
insurance policies that they still don’t
entirely understand.
Further, given the nature of term
insurance - you will be completely
out of the picture at the time of the
claim. So, how do you make sure
your family gets the amount, and a
sufficient amount in that - for all
their needs? How do you know that
you’re making the right decision at
every point?
This book will be useful if you Take pride in being meticulous,
and ensure that you always buy
the right stuff for your family.
Appreciate straightforward
answers from experts, with no
sugarcoating
Are tired of getting unconvincing
sales-talk to your simple
insurance questions
That’s where we step in.
We’ve designed this ebook to help
you take a step-by-step approach to
buying a term insurance policy that
is right for you. It contains researchbased advice, calculators and
examples that will simplify this
process and help you walk the
journey with confidence.
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RAHO
BESHAK!
Watch out for
RAHO BESHAK!
Rare and super
useful tips and
recommendations
you won't get from
anyone else!
Chapter One
Understanding Term Insurance
This chapter covers
What is Term Insurance?
Who should buy Term Insurance?
Examples of personas that need and need not buy term insurance
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Understanding Term Insurance
Understanding
Term Insurance
Your family needs your love and care. What they also
need is financial security. As a provider, it is your
responsibility to plan for the worst possible scenario,
keeping in mind that that you might not be around to
fulfil every single one of their dreams, in the short-term
as well as long-term.
And, the best way to do that is by getting a Term Insurance policy. Term
Insurance is a type of life insurance that provides a lump-sum amount to your
family, in the unfortunate instance that they lose you, during the term of the
policy.
It is the easiest way to ensure that 'financial burden', doesn't come between
them and their lifestyle or big dreams. And, all you need to do is take a simple
policy.
Term Insurance is the world's most efficient and cheapest way to ensure
your family's financial security
In the event of your demise during the policy 'term', your family gets a
fixed amount of cash
If you outlive the policy, you don't get a payback. That's the only tradeoff.
Take
note!
Apart from Suicide within the first year of the
term, there are no causes of death excluded in
a term insurance policy.
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RAHO
BESHAK!
Understanding Term Insurance
WHO SHOULD BUY TERM INSURANCE?
You should buy a term insurance policy, if you Have dependents, especially non-earning family
members (such as children, a spouse, retired parents)
Haven't yet saved enough corpus for all your
family’s present and future financial needs
Have a large loan that might burden your
family, in case of your death
Have major unfinished responsibilities
like children's education, weddings etc.
Here are some examples to give a little more clarity...
SHOULD TAKE
TERM
INSURANCE
REHMAN
31 Year old, Married
Planning children in 2
years
Has a home loan of
INR 55 Lakhs
Retired parents
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NEED NOT
TAKE TERM
INSURANCE
SANJANA
29 year old, Single
No financial
dependents
Parents are doctors
and financially
independent
NEED NOT
TAKE TERM
INSURANCE
SURAJ
33 Year old, Married
No dependent
parents
Spouse is employed
and financially
independent
No loans
Understanding Term Insurance
Summing up!
You must take a term insurance policy if you've got dependents, and
have not yet accumulated enough wealth to take care of all their
financial needs - present and future.
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Chapter Two
When is the right time to buy?
This chapter covers
How to choose the perfect time for you to buy a policy?
Thumb-rule or Dumb-rule? - Buy Early Save More
How to pick the right time to buy and make a small saving?
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When is the right time to buy?
When is the right
time to buy?
The right time to buy term insurance is as soon as you have financial dependents
or take a large financial loan.
Well, who counts as a financial dependent?
A financial dependent is anyone who
depends on your earnings, for their
lifestyle. They could be your Spouse
Children (present and planned)
Parents
As well as Other earning members, like a spouse with
whom, you have taken a joint loan.
Watch out for signs like You start paying monthly and yearly bills
You get married or become a parent
You take a large house loan
HOW DOES - BUY EARLY, SAVE MORE - WORK?
The premium is charged based on the age at which you enter the policy, and
then this rate remains constant, throughout the tenure. The general rule of
thumb prevalent in the market is that you buy it as early as possible, to keep
life-long premiums low. Let's look at an example.
Say, you want to buy a policy for a 1 crore cover, for a term until you're 65.
Here's the premium you would pay, adjusted for inflation, depending on when
you begin the policy.
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When is the right time to buy?
Age you
start
Premium
(Example)
No. of annual
premiums
Aggregate
Premium paid
during the term
Cashflow
(factoring an annual
6% inflation)
25
10000
10,000
40
4,00,000
1,59,000
30
12,000
35
4,20,000
1,84,000
35
15000
15,000
30
4,50,000
2,19,000
As you can see, the savings on the aggregate premium paid, are pretty marginal
to justify an early purchase. However, if you consider inflation or factor the timevalue of money, you realise that buying early could actually save you a
considerable amount of money over time.
Having said that, a term insurance policy is only meaningful
when you have dependents, or plan to have them in the near
Remember!
future.
If you are sure about not having dependents anytime
soon, you can skip it.
RAHO
BESHAK!
BUT REMEMBER...
As you grow old, the chances of contracting a lifestyle disease, like diabetes or
high cholesterol rise significantly. These changes could mean much higher
premiums, or even policy rejection. Keep in mind...
Policies could get
rejected or premiums
raised by 50-100%, if
you develop a lifestyle
disease
Annual premiums
usually rise by around
4-8% when you cross
your birthday.
If you're going to be 35 soon, and intend to have dependents in the future - NOW
might be an ultimate deadline to get any meaningful advantage from a term
insurance policy.
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When is the right time to buy?
Here's a tip!
If you have your birthday in the next few months, do all your
research and buy the policy before it. It will give you a
ready-made premium reminder, as well as a decent saving for
being a year younger!
Summing up!
Anyone who depends on your income for their current and future
lifestyle is a financial dependent - and term insurance will help them
retain that lifestyle, even after you die.
Buying a policy early might be cheaper, but you don't need it if you
don't have or plan to have dependents in the near future.
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Chapter Three
Choosing the policy duration
This chapter covers
What does it mean to become financially free?
Do ultra long-term policies make sense?
How to leave a financial legacy for your family through term
insurance?
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Choosing the policy duration
Choosing the
policy duration
You only need a term insurance policy from
the point in life when you have financial
dependents, to the point when you become
financially free.
But, what does it mean to 'become
financially free'?
Becoming financially-free means different things to different people. But,
generally here are some indications.
You have built a substantial corpus, that will provide passive income for you
and your family's everyday needs
You have fulfilled your major financial responsibilities - children's education,
home loans, children's weddings etc.
Your kids have become financially independent, and wouldn't depend on you
for any of their monetary needs or big dreams
Once these happen, you can stop your term insurance policy. This is the
traditional thought process. But, there is another school of thought as well.
TERM INSURANCES WITH COVER TILL AGE 99
Ultra long-term policies with a maturity age of 85 and even 99 years are often
promoted as a cost-efficient way of leaving a financial legacy for your family.
As it is less probable that one would live so long, these durations ensure a
'guaranteed return' to your family, so to speak. But, do they make sense for
everyone? Let's crunch some numbers.
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Choosing the policy duration
Say Mr. Kumar decides to buy term insurance of INR 1 Crore when he's 30
years old with a term until 99 years. Let's see how the returns vary depending
on when Mr. Kumar passes away.
Pay Type
Yearly
Premium
Age at
death
No. of
years paid
Total paid
till death
Claim
received
%Return
generated
Regular
₹ 28,176
85 yrs
56
₹ 15,77,856
₹ 1 cr
5.42 %
Regular
₹ 28,176
65 yrs
36
₹ 10,14,336
₹ 1 cr
10.30 %
Limited
(30 years)
₹ 35,104
86 yrs
30
₹10,53,120
₹ 1 cr
5.33 %
Limited
(10 years)
₹ 80,664
70 yrs
10
₹ 8,06,640
₹ 1 cr
7.08 %
Limited
(10 years)
₹ 80,664
99 yrs
10
₹ 8,06,640
₹ 1 cr
3.90 %
From the example above, if Mr. Kumar takes
a policy with a cover up to age 99 and
passes away at the age of 65 - the
investment could bear an interest as high as
10.3%. On the other hand, even if his death
happens at the age of 99 just before the
cover ends, the premiums get an annual
tax-free interest of 3.9%.
Of course, the catch is if he survives that
period, he won't get any payback. But
surely, he won't complain about a
remarkably long life! :)
So, here's some unconventional 'Beshak'
advice.
If you are looking at leaving a financial legacy for your
family that makes a 4% annual tax-free interest for a
term as long as 50 years, an ultra-long-term policy
might be a good strategy.
If this doesn't really excite you, you should take a pass.
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RAHO
BESHAK!
Choosing the policy duration
Summing up!
You become financially free once you don't have any dependents (or)
have created enough wealth to support all your family's needs - and
then, you do not need a term insurance policy anymore.
Ultra long-term policies only make sense if you're excited about
getting a 4% annual tax-free interest for 50 years. Otherwise, skip
them.
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Chapter Four
How much cover do you need?
This chapter covers
Detailed calculators of the Living Expenses, Big Dreams Fund and
Major Liabilities.
Risk factors to estimate how useful your existing funds would be.
Example for calculating the actual cover a family would need.
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How much cover do you need?
How much cover do you need?
'20x your yearly income' is the most commonly
recommended thumb-rule formula for calculating the
cover.
But, like every thumb rule this one too has its flaws,
and you've got to be extra careful. Imagine the 'duh'
on your wife's face, if the amount she gets hardly
covers the family's needs or your pending liabilities?
So, get yourself some coffee, a few sheets of paper, your favorite pen - and sneak
into that cozy corner of your house. Let's do this the 'Beshak' way!
Important Note: For the sake of this calculation, we are considering a scenario
that death happens one day after the policy is taken out.
First, calculate the Living Expenses Corpus...
This is the corpus you'll need to create, to ensure that your family receives a
passive income, to meet their day-to-day expenses.
For this, take stock of all your monthly expenses as well as annual expenses like
health insurance, school fees, etc. You can exclude EMIs for Home or Car Loan
from this calculation, as these will be taken care of, later.
Divide this amount by the rate of interest you expect. For ease, you can consider
this as 3%, a typical FD interest after cutting taxes.
Total Living Expenses
with current lifestyle
Rents
School fees
Monthly bills
Maid, driver
salaries
Household
expenses
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÷
3%
Divide this
amount by the
rate of interest
you expect
=
This is the
Living Expenses
Corpus
How much cover do you need?
Then, we get to the Big Dreams Fund...
This fund ensures all the big dreams your family come true. Your spouse gets to
take a sabbatical and do that expensive MBA program. Your children have the
resources to pick the best universities in the world they want to study at and
have a big fat destination wedding.
Spouse's
higher
education
+
Children's
education
+
Wedding
expenses
=
This is the Big
Dreams Fund
Now, calculate your Major Liabilities fund...
You don't want your family to be burdened by any large loans. Your term life
insurance can unburden them, so they live a debt-free life. Here you add up all
the big loans - especially home loans. Think this through carefully, and
remember to include any business or personal loans - and even those where
you are a personal guarantor.
Home loans
+
Other large
payments
+ Guarantees =
This is the Major
Liabilities Fund
And finally, take a look at your Existing Funds
Take a complete stock of the existing funds you hold. This is the money or
financial assets that you currently have - Fixed deposits, Mutual Funds, Equity
shares, Cash, Cash in the bank, etc. But, before you add them up we need to
value them based on their risk and utility.
For instance, value all the equity shares, equity-linked investments
conservatively at 50% of their current value. From a utility perspective, value
family gold and the property you live in at 0% - as you don't want these to be
sold to square off your debts or pay for your family's future expenses.
High risk investments such as equity stock options are also considered at zero
value - so, anything that becomes available is a welcome bonus!
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How much cover do you need?
Accounting for this disparity, through a 'risk-factor', prepares you for the
worst-case scenario. Here's how you go about it.
Sum up all your
investments, savings etc.
Risk factors
Savings in cash, FDs, SB A/C
Categorize them into types
of assets.
Apply the following factors
on these assets.
Equity shares
50%
Gold, residential property
0%
Equity stock options
0%
=
Sum up all these re-evaluated
investments
100%
This is your
Existing Funds
Once you have these calculations done, your required sum-insured can be
calculated as follows.
SUM INSURED
=
Living
expenses
fund
To keep your
family's current
lifestyle intact
+
Rents
Groceries and
monthly
supplies
Monthly bills
Major
expenses
fund
To pay off big,
expected
expenses
Education
(Spouse and
kids)
Weddings and
celebrations
Exclude
EMI for selfoccupied house
ADD
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+
ADD
Major
liabilities
fund
To pay off any
loans and
liabilities
Home loans
Other large
loans
Guaranteer on
business or
personal loans
ADD
_
Existing Funds
Re-evaluated
with risk
factors
Savings in cash
& FDs
Equity
investments
Gold and
residential
property
Stock options
and high risk
investments
MINUS
How much cover do you need?
Let’s look at an example of Manish, a 31 year old software engineer, who
draws a yearly salary of 20 Lakh rupees. This is how his finances look, at this
moment.
His current living expenses are
Rs. 75000 a month. (Excluding
EMIs on loans)
----------------------------------The major expenses, he is
expecting in the future are Wife planning to do an
MBA in a premier institute
in 2 years - Rs. 20 Lakhs.
Kid's Education - 50 Lakhs.
Kid's wedding - 50 Lakhs
His major liabilities include Home Loan: Rs. 75 Lakhs
Personal Loan: Rs. 15 Lakhs
----------------------------------He has the following existing
funds Savings - Rs. 5 Lakhs
MF - Rs. 40 Lakhs
FD - Rs. 5 Lakhs
Gold - Rs. 5 Lakhs
House - Rs. 1.2 Crores
Let’s calculate the life cover required.
Money he owes...
Money he has...
Living Expense Fund
= (75000 X 12) ÷ 3%
Savings + FDs @100%
=5 L + 5 L
Major expenses fund
= 20 L + 50 L + 50 L
Mutual Funds @ 50%
=40 L X 50%
Major Liabilities Fund
= 75 L + 15 L
Gold, House @ 0%
= (1.25 Crores) X0%
= 3 Crores
= 1.2 Crores
= 90 Lakhs
Total Liabilities
= 5.1 Crores
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= 10 Lakhs
= 20 Lakhs
= 0 Rupees
Total Existing Funds
= 30 Lakhs
How much cover do you need?
So, the required cover for Manish is the difference between this liabilities and his
existing funds. That is - 4.8 Crore Rupees
If he went by the usual calculation of 20X his yearly salary, he would only take a
cover of 20 X 20 Lakhs, that is - 4 Crore Rupees, leaving his family without
sufficient cover, a whopping 80 lakhs short. Further, in this calculation, we haven't
factored inflation. If you have to - you should factor at least 2.5X this coverage
amount or buy an increasing cover that takes your cover systematically to 2X.
Note: If you have any other insurance cover, you can subtract that amount from
the cover needed.
Make sure that you review your cover amount every few years, to ensure you
account for any new, unplanned responsibilities you take up.
This is the most meticulous and scientific way to
calculate the exact amount that your family needs instead of depending on a random figure.
RAHO
BESHAK!
Maintain and monitor your expenses, financial goals, investments
and liabilities in your personal financial spreadsheet. Take your
partner through this sheet and share access with them.
Here's a tip!
Summing up!
The 20x yearly income thumb-rule could leave your family
insufficiently covered. So, it's recommended that you calculate a
required cover comprehensively.
Add the Living Expenses Fund, the Big Dreams Fund and the Major
Liabilities Fund. From this total, subtract the risk-factored Existing
Funds. This gives you the exact amount you'll need to cover for.
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Chapter Five
Customizing your policy
This chapter covers
How to choose the right payment frequency, payout options and pay
model?
What are riders and which ones are the most useful?
What are increasing covers and are they useful?
'Beshak' tips on how to get the most out of every customization
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Customizing your policy
Customizing your policy
Most modern Term Insurance plans allow you to customize the policy to suit your
personal preferences. Here are the top categories that you should take note of:
Payment Frequency
Payout Options
Pay model
Riders
Payment Frequency
Most insurers will offer you a choice between payment
modes based on your convenience, at a very low or no
difference in the final effective amount you pay.
You can change your payment frequency at the time of a
renewal.
To avoid large annual payments, you could choose monthly payments. But,
ensure that you strictly set up auto-debit or standing instructions so your
premiums are paid on time, and your policy remains active.
Put your the standing instructions on a bank account, instead of
credit/ debit cards, to avoid delays and lapses when they expire.
Keep an eye out for any failed payments, and pay immediately.
Here's a tip!
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Customizing your policy
Payout Options
Duration
Insurance plans offer multiple options by which
your nominee can receive the claim payout. This
is one of the most important customizations, that
is usually missed. It basically allows you to
configure how your family receives the money.
When you're not around anymore, your family
will suddenly have a huge balance in their bank
account, and may not be prepared to deal with
that change. There have been thousands of
cases, where gullible family members were
persuaded to take actions that weren't exactly in
their best interest.
Hence, depending on your nominee's financial aptitude, you should decide on an
option of spreading out the payout into parts of a fixed amount and monthly
payouts across the years.
Here are the options usually available:
Lump Sum is the option where the entire cover is credited to the nominee’s
bank account.
Lump Sum with Monthly Income is an option where a fixed amount is
credited on death, and the remaining amount is credited every month over a
period of 10 to 15 years
Only Income is an option where the claim is paid out in monthly payouts over
a period of 10 to 15 years.
If your spouse or dependent is not financially well-versed, it
would make sense to opt for a Lump Sum + Income Option.
Here's a tip!
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Customizing your policy
Premium Pay model
Duration
Term Insurance usually requires you to pay
premiums every year until the end of the policy
term. However, there are alternative ways to
pay-off the premiums in shorter and faster
instalments.
Limited Pay is one such option that allows you
to speed up your premiums in bigger
instalments, quickly - while enjoying the cover
for a longer duration.
Limited Pay is useful if you -
Want to get the payment liability off your chest quickly
Have, or expect to have unpredictable income in the future
Want to take an ultra long-term cover, beyond retirement age
Does Limited Pay save money?
The usual argument is that the sum of the premiums you pay in Limited Pay
is lower than the aggregate premium you pay in the case of a regular
payment term. But this calculation does not take into account the 'time
value of money'.
When we calculate the Net Present Value of the premium paid in both the
cases, the answer could vary depending on the insurer and the paymentterm.
Let us explain with an example.
Raman is a Male, 30 year old, non-smoker who is buying a Rs. 1 Crore policy
until age 75. Here is the comparison of present value of premiums he will
pay in both cases - Limited pay and Regular pay.
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LIMITED
PAY
REGULAR
PAY
Customizing your policy
No. of years,
premiums are paid
Yearly Premium
amount
NPV of full
premium @ 6%
Full term
(45 years)
19,932
3,26,549
30 years
20,672
3,01,619
10 years
38,904
3,03,517
5 years
76,326
3,40,803
In this example, you’ll see that the Limited Pay option is definitely better
compared to Regular Pay. However, Raman only gets the maximum
benefit, if he chooses the 30 year pay option.
The bottomline is Use the Limited Pay option if it is a strong preference
based on your financial life. For example, if you think
your business income can be very erratic in the future.
Do not blindly follow any thumb-rules. Ask your
advisor to calculate NPV on the cash outlays before
taking a decision.
Choosing riders
What are riders?
Riders are provisions that give you an option to gain
additional benefits, for your existing cover. With a
minor extra cost, they offer ‘ready-made’ extensions
for special circumstances.
Riders help you make quick and instant decisions in
terms of finishing your purchase decision. Here are
four common types of riders in the market.
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RAHO
BESHAK!
Customizing your policy
1. Critical Illness Benefit
In today's fast-paced, stressful life the
risk of being struck by a critical illness is
very real. Even individuals with an active
lifestyle cannot be a 100% sure that
they wouldn't contract a serious ailment
that will drain them physically,
emotionally and financially.
Further, advanced medical science will ensure many of us are able to live even
after suffering from a critical illness, albeit with high healthcare expenses and low
or no income.
So, you will likely be left with large and recurring hospital bills, and an impaired
means of earning for your family. A Critical Illness rider helps cover such a
financial loss by paying a fixed cash benefit, in case you are diagnosed with any
serious illness listed in the policy.
Most important: This is easy to miss. Be careful about the Type of Rider
you choose. If the rider is an 'accelerated cover', it is not a separate
cover. It merely pays you an advance out from your base term life cover
amount.
Finally, remember such riders will usually be a tad inferior to a specialised
standalone critical illness cover that will cover early-stage illnesses as well.
They might even charge an almost similar add-on cost, as the premium of a
standalone Critical Illness cover.
Another critical thing to remember is to not get swayed by the sheer number of
illnesses covered.
Many lists of critical illnesses will expand the ailments into sub-categories
to show higher numbers of illnesses.
Experts say that the top 6 illnesses cover more than 90% of the critical
illness that occurs. Many on the list could be rare diseases that have very
low probability.
Check the list provided by your insurer carefully, before signing up for a critical
illness rider.
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Customizing your policy
Illnesses covered
Ensure at least the most
common conditions like Cancer,
Heart conditions, Paralysis,
Stroke, Kidney Failure, etc. are
covered
Age Limit
Check the age until when this
cover applies
Type of rider
Ask whether the cover is a
separate sum insured or an
accelerated cover( which is
merely an advance payment
from your main term insurance
cover)
What's the 'Beshak' recommendation?
Do not buy an 'accelerated' critical illness cover. Instead choose a standalone
critical illness policy that will provide wider coverage.
Do not get swayed by numbers. Check the detailed list of illnesses, and only
purchase it if the list is satisfactory.
Riders are often trade-offs between the convenience of an instant purchase,
and the extra effort/ time that another detailed plan will demand. Choose
wisely.
2. Accidental death benefit rider
Accidental Death Benefit usually pays out an additional death benefit in case of
accidental death.
On comparison, we found that an additional full term insurance cover is only
marginally costlier than a rider. However, this cover can be useful for people
who are unable to get a large cover, due to eligibility issues. Otherwise, take a
pass.
What's the 'Beshak' recommendation?
If you are eligible, just take a separate, additional cover and skip the rider.
www.beshak.org
Customizing your policy
3. Accidental disability rider
Financial cover for the risk of disability is an
important cover one must consider.
Disability, similar to critical illness, can cause
more financial havoc than even the early
death of a breadwinner.
The cost of accidental disability starts from
the healthcare cost of treating the injury,
maintenance, modifications of the house/ car,
to the loss or decrease in future means of
earning. This rider provides a fixed cash
benefit to cover all these costs.
This is a very serious risk that requires specialized financial protection. A rider
will provide a quick short-cut cover, but may not solve the entire problem. For
instance, while most disability riders cover permanent total disability due to
an accident, a standalone comprehensive personal accident cover will provide
a specialized, comprehensive cover at nearly the same premium.
What's the 'Beshak' recommendation?
Don't take a short-cut. Instead, look for a specialized cover, for your own
financial security as well as your family's.
4. Waiver of premium on critical illness
These are low-cost add-ons that will waive the burden of paying your
future term insurance premiums in case you are diagnosed with a listed
critical illness or are permanently disabled due to an accident.
'What's the Beshak' recommendation?
This is a no-brainer rider, and you can consider buying it. These riders may have
a separate maximum duration of cover, go for the maximum cover available at
your age.
www.beshak.org
Customizing your policy
Increasing Covers, and when should you choose them?
During the course of your life, your income,
expenses, and liabilities are likely to rise as
you grow older, get married, become a
parent and take up more financial
responsibilities.
As a result, your term insurance will require
at least two upgrades if you begin before the
age of 35.
For this, you've got two options. Either a Manual milestone-based approach, or
an Automatic increasing cover. Here is how the two types compare.
Automatic
Increasing Cover
Feature
Manual Upgrades
Type of upgrade
Manually take a fresh policy to
increase cover, as
responsibilities increase
The policy systematically
upgrades, until a maximum
cover limit.
Medical tests
Medical tests will be needed to
rule out any new chronic
illnesses
No new medical tests would
be necessary
There are chances of rejection,
during the upgrade
There is no risk of the upgrade
being rejected
Are generally expensive
Are compartively cheaper
Policy rejection
Cost
What's the 'Beshak' recommendation?
Every insurance plan can have different conditions with
respect to an Increasing Cover. Go for an option that
systematically upgrades your cover to at least 2X before
the end of the policy term. The increasing cover option is
clearly, a no-brainer!
www.beshak.org
RAHO
BESHAK!
Customizing your policy
Increasing Covers, and when should you choose them?
Summing up!
You'll need to customise the payment frequency, payout options, pay
model and riders to arrive at a tailored plan that fits all your needs.
Riders are short-cuts to comprehensive plans. Skip them and take
dedicated covers for all additional needs.
The only rider exception is the 'waiver of premium on critical illness',
which you can consider.
Increasing covers are a fantastic way to stay sufficiently covered
throughout your lifetime. Always choose them.
www.beshak.org
Chapter Six
Important things you should know
This chapter covers
Thumb-rule or Dumb-rule? : Claim Settlement Ratio
The most important thing to ensure your family gets a payout
The importance of assigning a Nominee
Why is the Married Woman's Property Act important?
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Important things you should know
Important things you
should know
Here are some other things you should be
aware of, before making an informed
purchase decision.
The myth and fuss around Claim Settlement Ratio
The claim settlement ratio basically measures the
number of claims an insurance company has paid,
against the number of claims made by the
nominees/beneficiaries. It is denoted in the form of a
percentage.
For example, if an insurer has a claim settlement ratio of approximately 98%,
this means that they have settled 98 claims out of every 100 claims received.
However, this does not really represent the actual claim experience.
IMPORTANT: A good insurer has strong financial control, and
will decline fraudulent or invalid claims, to sustain themselves
for another 30 years and pay your claim.
RAHO
BESHAK!
Remember A low claim settlement
ratio doesn't mean that
the insurer has a bad
claims experience
A high claim settlement
ratio doesn't guarantee a
claim settlement for you
The only thing that will guarantee that your family is paid the claim amount, is a
diligently filled form, giving every specific detail with utmost accuracy. (more
about this in the next section...)
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Important things you should know
Ensuring a payout begins with filling the form right
The proposal form is the basis on which an insurer is giving you the insurance
cover, and hence it is by far, the most important document to ensure that your
family has a hassle-free claims experience.
Ideally, you need to understand the claim settlement process before you fill the
proposal form. When you buy the policy, the insurer may be cool about your
declarations and issue the policy, but each declaration you make is scrutinised in
detail at the time of claims.
They will want to check whether you made the right declarations, whether any
information you shared was false or inaccurate, especially in cases of an early
death. Just keep the following in mind.
Fill the proposal form
yourself. Ensure you declare
complete information for
everything it asks - your
profile, health conditions,
family medical history and
more.
In case you have any chronic
health condition, insurers are
likely to request for an
additional premium (could go
as high as 50% more) over
the standard premiums for a
healthy individual.
A term insurance cover is super important - all the more so, if you have a
health condition, so go ahead and pay the price.
If you follow all guidelines and declare all information to
the best of your knowledge, insurers are bound to pay out
the benefit to your family.
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RAHO
BESHAK!
Important things you should know
Appointing a Nominee
You will need to identify a nominee or nominees, for each policy you buy and
take them through the claims settlement process, so they're well informed.
As per Section 39 of the Insurance Laws (Amendment) Act 2015, the
selected nominees (amongst parents, spouses or children) are the ultimate
beneficiaries of the insurance claim money. This ensures that the money
goes to a specific recipient as per your choice, when multiple legal heirs are
present.
In addition to appointing nominees, it is recommended that you create a will
to account for the following scenarios.
If you want to nominate someone other than a parent, child, or spouse.
In the unfortunate case that all your nominees pass away, the payment
would be made as per the will.
Ensuring that your family gets the claim money (and no one else)
In the absence of a will, there is a risk that
your wife and children might not receive
the payout directly. Other family members
might claim to be legal heirs (especially in
joint families), or there might be personal
loans/ liabilities that need to be paid off
before your family receives any money.
To avoid this, you can purchase the policy
under the Married Women’s Property Act
(MWP).
How does it work?
The MWP act can provide the married woman and her children, exclusive rights to
the payout amount of a term insurance policy. This can be done by signing an
addendum attached to the proposal form.
In the absence of this, creditors will have the first right to access funds from your
term insurance payout - on your demise.
www.beshak.org
Important things you should know
Take
note!
MWP can only be done at the time of taking the policy, and NEVER
later. So, if you are married be sure to opt for it.
With the MWP addendum attached to your term insurance policy, your family
would be Secured permanently: Once this addendum is
submitted, even the insured person cannot assign or
change details - even if there's a divorce.
Assured payment: Policy payouts are insulated from
the liabilities of the insured person, so the wife and
children will definitely get the benefit.
RAHO
BESHAK!
Summing up!
The claim settlement ratio is not the best way to judge the quality of
your insurer.
Always fill the proposal form yourself, and declare all information
accurately and completely. This will help your family have a smooth
claims process.
Appoint a nominee (or multiple nominees) for every single policy you
take
If married, sign the MWPA addendum, while taking the policy to
ensure your wife and children are assured the claim amount.
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Frequently Asked
Questions
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FAQs
Frequently Asked Questions
Here's a list of some common questions that we've heard over the years.
Can I upgrade my existing Term Insurance policy?
No, you cannot upgrade your term insurance policy.
You will need to take a fresh policy when you want to upgrade your
cover, and go through the same process (or even a more detailed
process), given that you would have grown older. We recommend the
following:
Ensure you buy adequate cover when you start.
Opt for an increasing cover option that systematically upgrades your
cover by at least 2X by the end of your term.
What are the reasons for the policy to get rejected?
Life insurance companies provide Term Insurance after evaluating three
important things:
Quality of life (through indicators like city, educational qualifications,
occupation, etc.)
Health, lifestyle, habits
Income
If you turn out to be a high risk in any of these categories, your proposal
may be declined or premium increased.
In addition to this, if you've made any representations that cannot be
validated through documentary proof, the insurer might decline your
policy proposal.
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FAQs
Should I choose the cheapest policy, or go for a brand?
Once you choose a specific product configuration, where you buy from
doesn’t really matter. Every insurance company is legitimate and
governed by IRDAI regulations, and as long as you have been
transparent in your declarations, your family will get the claim.
Important Note: A new insurance law (Sec. 45) guarantees that
your claims cannot be rejected for any reason, after an initial
waiting period of 3 years. (as long as you pay your premiums on
time)
After getting the policy do I need to update it in case of health
issues, smoking etc.?
No there is no requirement as per the conditions of any policy that
requires you to inform the insurer about any such change after you have
bought the policy.
Important Note: It is your duty to inform the insurer of any changes in
your declarations, during the period between submitting the proposal
form and receiving the policy document.
Should I buy two policies just to diversify my cover across two
insurance companies?
It doesn’t really matter. If this is the first time you are buying a cover, a
single policy to cover your entire eligibility is better. A few years later,
when you are buying a new policy to upgrade the cover you can opt for a
different insurance company. The de-risking is actually redundant.
On the flipside however, your family will have to go through the pain of
dealing with, doing paperwork for and following up with - two insurance
companies instead of one.
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FAQs
What are the reasons for the claims to get rejected?
Claims can get rejected when you knowingly provide an incorrect/
misleading declaration in the proposal form especially with regards to
health, lifestyle, medical history, family medical history, income, etc. This
would include anything that muddles the insurer's view with respect to
the risk they are covering. Always fill the proposal form yourself and not
depend on any advisor or seller.
Protection u/s 45: Section 45 in the Insurance Act protects the customer
with better visibility on receiving claims payment in the long run.
With this clause, insurers cannot investigate claims for misrepresentation
or omission after the policy has completed 3 years. Hence it's almost
guaranteed that once you have completed three years of the policy term,
your family will get the payout, as long as you pay your premiums on
time.
Do I have to inform the company about any health conditions?
Before you get your policy, you must clearly and accurately describe all
your health conditions.
If you have a chronic health condition, insurers are likely to request
for an additional premium over and above the standard premiums
calculated for a healthy individual. (it is safe to assume a 50% higher
premium)
A term insurance cover is super important, and more important if you
have a health condition, so go ahead and pay the price.
www.beshak.org
FAQs
What should I do if the insurance company closes down?
IRDAI requires every Insurance company to maintain a solvency ratio
which measures the capability of the insurer to pay claims.
This is reported every quarter. IRDAI monitors this and also pulls
insurance companies who aren't able to achieve it. This ensures that
every insurer has enough reserves to pay every claim they receive.
In case an insurance company folds up and closes down, IRDAI usually
finds an existing insurance company with strong financials to buy that
company over.
This ensures that you, the customer is financially protected always. One
of the core objectives of IRDAI is protecting policyholders' or customers'
interests.
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The 8 Commandments Of A Term Insurance Decision
The 8 Commandments Of
A Term Insurance Decision
Buy Term
Insurance if you
have financial
dependents, a
large loan,
unfinished
responsibilities
etc.
A '20x annual income' thumbrule might not always work for
cover calculation. Account for
all your living expenses,
liabilities, financial
commitments and existing
wealth to calculate the cover
you need. Do the math!
Don't buy it until you
have dependents, or have
definite plans in the near
future.
End your policy
as soon as you
accumulate
enough wealth
for your and your
family's future
expenses.
Skip riders and go
for separate
specialised
covers. Check
Beshak.org for
options.
Go for the increasing cover
option, for a hassle-free
and systematic upgrade of
your term insurance cover.
Choose the right claim payout
option, based on your family's
comfort and financial
knowledge. If your spouse is
not financially well-versed,
choose the 'lump-sum +
income' option.
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If married and male, opt for
the Married Women's
Property Act when you buy
the policy.
Final Word
Final Word
There is no point over-analyzing.
This is a simple cover. Your family is likely to regret having no cover at all,
instead of a moderately good one. Trying to get everything right is only going
to delay your decision, and in this case that can be very risky.
Fix a reasonable deadline to compare, research, question, and shortlist a couple
of options. Then just pick one.
Thank you for reading. Do share this with friends and family.
Good luck, and have a great life ahead!
- Team Beshak
www.beshak.org
Image Credits
Resources from Freepik have been used in the design of
the following pages 4
Illustrations by Freepik Stories have been used in the
design of the following pages 5, 6, 7, 8, 9, 11, 12, 15, 16, 17, 19, 20, 25, 27, 28, 29,
30, 32, 33, 35, 36 and 38