Insurance being a contract governed by the doctrine of good faith, nondisclosure of correct information on the part of the insured may result in claims getting rejected.
Arvind Kumar, a 38-year-old real estate professional in Bengaluru, feels that term life insurance policies can play an important role in securing his family if something happens to him. He has taken policies from HDFC Life and Max Life Insurance, and considers term insurance plans as much more beneficial than endowment plans, as he gets a better life cover at a lesser premium. Endowment plans, he says, offer minimal coverage for very high premiums. Thanks to term insurance plans, a person can save much more than the maturity amount of an endowment plan, without the burden of paying costly premiums over the years.
Arvind has kept 62 as the cutoff age for the two term life insurance plans he has taken. Before choosing the plans, he had carefully checked the viability of the insurance companies and their claim ratios. And, today, he feels secure.
People like Arvind are now increasingly opting for term life insurance plans, which secure a family’s financial needs in case the insured person, usually the breadwinner of the family, dies. Term insurance plans offer lump sum payment of the sum assured. The payout can then be used to settle liabilities, cover expenses and invest in other plans. A term plan generally provides a high sum assured at a low premium and the premiums paid qualify for deductions under section 80C of the Income Tax Act.
Term plans are the most basic form of life insurance. But the benefits they offer are gained only if the insured person dies before completing the term. If the person outlives the term, he does not receive any benefit. It is because of this feature that term plans offer higher life covers at lower premiums, compared with endowment plans. For instance, if the sum assured is Rs1 crore, the annual premium for endowment plans or unit linked insurance plans would be around Rs75,000 to Rs1lakh, while in the case of term insurance plans, it would be between Rs15,000 and Rs20,000.
Choosing an appropriate term insurance plan is important. “In the absence of life of the insured, an insurance plan must guarantee an appropriate financial cover to his or her dependents. One should consider the basic expenditure that his or her family will incur, along with major expenses like education, marriage of children and other liabilities like loans, before finalising a sum assured for the plan. It is prudent to consider inflation rates and probable changes in lifestyle, before finalising the sum assured,” said Nilesh Parmar, chief operating officer, Edelweiss Tokio Life Insurance.
Another factor to consider is the tenure for which one needs the life cover. The benchmark is the earning years of the insured person. Companies offer different payment terms. So, if you want to finish off the payment requirements early, choose a shorter payment term, the premium for which will be higher than normal. Before zeroing in on a policy, go through different term insurance plans in the market. It would be a good idea to visit websites that let you compare plans of various insurance providers.
“One also needs to consider factors such as the premium charged by the insurance company, and the claim-settlement ratio and brand value of the company before zeroing in on an insurance plan. In case pre-issuance medical underwriting is required, premium and brand value will have higher weightage,” said Feroze Azeez, deputy chief executive officer, AnandRathi Private Wealth Management.
For persons earning more than Rs7 lakh per annum, say experts, the term insurance cover should be 15 times the income. For persons earning less than Rs7 lakh per annum, the cover must be 20 times the income. “One must review one's term insurance and step up the life cover as per the life stage one is in. If one happens to be married, one may have to secure the spouse’s future, especially if he or she is financially dependent on you. After one becomes a parent, one has to take care of the child’s education and future as well. Hence, it is imperative for a person to upgrade the insurance cover regularly,” said Yashish Dahiya, chief executive officer and cofounder of Policybazaar.com.
According to him, one must choose a term plan on the basis of one’s financial goal, affordability and lifestyle. “One can choose between staggered or lump sum payout option as per one’s requirement. Most insurance companies offer staggered payout option on term plans, wherein the nominee gets a part of the insured amount as one-time investment and the rest is spread over a period of 10 to 15 years in monthly instalments. For example, if the total sum insured is Rs1crore, the beneficiary [of the policy] would get close to Rs10 lakh on the death of the policyholder. The remaining amount will be paid in monthly instalments over the next 10 to 15 years. Lump sum payout option is for those who are good at managing their money in an organised manner. Staggered plans, on the other hand, are for those who are not so good at managing money and require a bit of financial discipline. Interestingly, the premium of the staggered payout option is lower than the regular lump sum payout option,” said Dahiya.
As insurance companies aim at settling genuine claims and eliminate fraudulent ones, it is very essential for an insured to disclose all the information as required by the insurer correctly. It is on the basis of this information that the insurance company decides whether or not to offer life cover to an individual, and on what rates.
Insurance being a contract governed by the doctrine of good faith, nondisclosure of correct information on the part of the insured may result in claims getting rejected. It is advised that the customer read the policy document carefully and understand various terms and conditions. The claimant must also inform the insurer immediately whenever a situation arises for him or her to file a claim. Keep in hand all supporting documents required for the claim, as mentioned in the terms and conditions of the policy.
“At the time of filing claims, one can face issues such as forged age or identity proof of the life assured, nondisclosure of health status and medical history of self and family members, nondisclosure of lifestyle habits like use of tobacco and liquor, adventure activities, risks in job, etc. Care should be taken at the underwriting stage to provide correct and clearly visible KYC [know your customer] documents, income proof, health status and medical history of self and family members and lifestyle habits. Special care should be taken to disclose information for policies that do not require pre-issuance medical tests,” said Azeez.
As per section 45 of the Insurance Act, 1938, say experts, no life insurance policy can be called into question on grounds of misstatement after three years of the policy coming into force. “This amendment is a welcome change for policyholders, as it safeguards their interest and puts the onus on insurers to do proper checks at the time of underwriting,” said Dahiya. “However, if the insurer is able to prove that your claim for insurance was fraudulent, they can decline your request for claim settlement. Hence, one must observe due diligence at the time of filling insurance forms and nomination details. One's claim can be rejected if one provides misleading or incomplete information about one’s income, medical condition, lifestyle or family history. It is equally important for a claimant to register the claim within the stipulated timeframe.”