In our PrimeTime webinar on ‘Choosing the Right Term Insurance’ last Saturday, we received many thought-provoking questions from our subscribers and viewers that we could only partly address, given the paucity of time. Here’s are those Term Insurance FAQs based on your feedback during the webinar. Hope you find it useful!
Term Insurance FAQs
Q Can I take term covers from multiple insurers?
Yes, you can. But you need to make sure that you disclose your existing life insurance policies in full every time you apply for a new term cover. When an insurance company accepts a new policyholder, it evaluates if the insurance cover being bought is proportionate to the person’s income level and insurable value. The main purpose of a life cover after all, is to replace income and not to enrich anybody on your death.
Insurers will generally not accept to underwrite term covers that are disproportionate to your income. When you provide details of your existing policies, the insurer takes these into account while calculating your overall eligibility. This is why disclosure is key. As long as the total cover you seek under all your policies put together meets the insurer’s eligibility criteria, you can buy multiple term policies.
Q If I take multiple term plans from an insurance company, in the event of death, will the company pay up on the multiple claims or is there a possibility of some claims getting rejected?
The company will honour all claims as long as you have disclosed your older term policies to the insurer while signing up for new ones and have made correct disclosures in your proposal forms.
Q All insurers I spoke to were willing to allow me only 20 times my annual income as my eligible term cover. Would you suggest taking a limited term insurance now, and then taking another when this one’s term gets over?
It may not be necessary to wait until your current policy expires to enhance your cover. When your income and liabilities rise over the next few years, as you make headway in your career, you can apply for additional term cover and insurers will likely accept the application, given that your eligibility limits would have gone up by then.
Q Is it good to take term cover outside of the group cover offered by my employer?
Yes. It is useful to have a term cover outside of that offered by your employer because if you switch jobs or quit your current job, your family may lose the protection that they really need. Given that an employer is unlikely to be aware of your personal situation, dependants, liabilities etc, it is also quite likely that the group cover offered by your employer is not large enough to completely take care of your dependants in your absence.
Use Primeinvestor’s term insurance calculator to know how much insurance you require given your present situation. If the cover offered by your employer doesn’t match this sum, do make up the gap by buying an individual term policy.
Q I am a government servant of 46 years eligible for a pension after the age of 59 years. How long should I take term insurance?
This will depend on the size of the investment corpus including retirement benefits, that you will be in a position to accumulate by the time you turn 59. If your passive income (returns from your investments alone, without your working) can take care of your spouse’s living expenses, then you can take term cover until the age of 59. In the event of your death, income from the investments you leave behind will take care of his/her expenses. But if you believe that the investment returns will fall short, you can extend your cover to a maximum age of say 70 or 75 to bridge the shortfall.
However, extending your term cover beyond 75 will cost 2-3 times more in annual premiums and therefore, is not desirable. You should be looking at retirement planning to take care of your spouse’s needs after retirement and not insurance per se. You can invest a regular sum in SIPs in hybrid mutual funds to deliver a passive income to your spouse after retirement if you aren’t around.
Q You mentioned that if one is wealthy, he need not take a life insurance. But if insurance is all about replacing income, shouldn’t the wealthy go for even higher coverage so that his family can maintain the same lifestyle and level of wealth when he is not there? Isn’t this better than depleting the existing wealth?
You need to make a distinction between income and wealth here. If you already have sufficient accumulated wealth so that your family can manage on the interest, dividends and other forms of regular return from your assets, there is no need to take term insurance. This is because, in your absence, the income from your investments will continue to flow in, taking care of your family’s expenses.
If you however have limited accumulated wealth (assets) but high income, you do need a generous term cover to help your family maintain the same lifestyle in your absence. There’s also a caveat here. If you have high assets but also high outstanding liabilities, you will need a term cover so that your family isn’t left with very little after your passing.
Q You talked of not taking insurance if one is single or just graduated college. But as term insurance is much cheaper if taken in the 20s rather than in the 30s, isn’t it best to take it when one is just starting out?
Yes, it is 25-30 per cent cheaper to take term covers in your 20s as opposed to your 30s. But by starting in your 20s, do remember that you will also be paying premiums for ten extra years. You may take term insurance in your 20s if you have a dependant family, have plans to marry soon or have outstanding liabilities that would burden your family if you aren’t around. But most young folks today make decisions about marriage, children etc in their late 20s. Taking a term plan when you don’t have clarity on these decisions would be wasteful, as young folks without dependants do not need life insurance at all. Why lock into an insurance for 30/40 or 50 years without a real need for it?
Q Is it a good idea to go with insurers who waive medical tests while buying the policy?
No. Where medical tests are waived, there is a greater probability of an insurer disputing your family’s claim in the event of your untimely death. Most death claims that are rejected by life insurers are turned away on the grounds that the policyholder did not make accurate disclosures of their past illnesses, surgeries or pre-existing health conditions. Without medical tests, the risk of such repudiation is higher.
Most insurers insist on at least basic blood sugar and other tests while signing you up for a term cover. Insurers who don’t do this may be compromising on claims settlement ratios. Or they may be restricting their eligibility criteria to give you a very limited cover that doesn’t really protect your dependants.
Q If the mortality rate shoots up because of Covid-19 or natural calamities, do premiums on life insurance go up?
Premiums for life insurance contracts are based on mortality tables notified by IRDA from time to time. These mortality tables are compiled on the basis of the claims experience of insurers over long periods of time and are usually not influenced by one-off events. Events like natural disasters and pandemics automatically get factored into the mortality rates when multi-year data is compiled. Covid-19 has so far not resulted in a significant spike in overall death rates in India.
However, having said this, insurers do have the discretion to tweak their premiums or even policy conditions based on perceived risks from such events. Some insurers had, for instance, put new term covers for older investors beyond 65 on hold during the Covid-19 outbreak.
Q Is it worth opting for insurance plans that fall under the ambit of the Married Woman’s Property Act?
Yes, under special circumstances. Many insurers offer a clause in their application forms that allow you to sign up for the policy under the Married Woman’s Property Act (MWP Act). A specific section (section 6) of this Act allows term policies taken under this section to be paid to a trust. Should you face untimely death, the death claim under such policies can only be received by the trust and passed on to the beneficiaries you have named in your policy (can only be your wife or children). The money received from such policies cannot be appropriated by lenders with whom you may have outstanding loans or relatives or family members under your Will.
Such policies are useful if you have large assets that may be subject to family disputes, or if you foresee many claimants to your money after death, or have substantial loans by virtue of running a business. To avail of this provision, you may need to fill an addendum to the proposal form clearly laying down the beneficiaries and the proportion of the sum assured you plan to leave to each of them.
Q I see that no insurer has a 100 percent claims settlement ratio. What are the typical scenarios when insurers don’t pay the sum assured to the family?
You are right. No life insurer pays up 100 % of the claims because claims can be repudiated on the grounds of policy exclusions, fraud or material mis-statements or non-disclosure of important facts by the policyholder. There can be three sets of circumstances in which claims get rejected.
One, most life policies specifically mention the exclusions in their fine print. The usual exclusions relate to death caused by suicide within 1-2 years of taking the policy, indulging in dangerous or illegal activities like adventure sports and death by homicide, if the nominee is a suspect. Some term policies also don’t cover death by plane crashes, Acts of War, terrorism or natural disasters. Some don’t cover death during pregnancy or childbirth, through sexually transmitted diseases and driving under the influence of alcohol. You will need to check the specific conditions of your term plan in the proposal form, to know such exclusions.
Two, insurance contracts are based on the principle of ‘utmost good faith’ on the part of the policyholder. Claims can therefore be repudiated if you mis-state your age, pre-existing health conditions, actual income or any other key policy particulars in your proposal form.
In practise, most death claims are repudiated by life insurers for non-disclosure of pre-existing illnesses, past health conditions or surgeries at the time of signing up for the policy, which later turn out to be the cause of death of the policyholder. Not disclosing a history of smoking, narcotics or alcoholism can also lead to your family’s claims being rejected.
Three, claims can get rejected if you didn’t check your proposal form carefully enough and allowed an agent or intermediary to fill up incomplete or inaccurate details.
Avoiding such practices can help you ensure a better claims experience for your family.
More information about Married Women Property act – http://legislative.gov.in/sites/default/files/A1874-3.pdf