Life insurance: Know what type of life insurance to buy

Buying an insurance cover is protecting one’s family in the long run.

Only four out 10 life insurance policies are renewed after the fifth year, indicating poor persistency levels. Policyholders pay huge surrender costs in the initial years of the policy term. Low persistency means that policyholders are not giving adequate thoughts to the needs of a life insurance policy for long-term protection.

The persistence ratio of all life insurance companies is measured at 13th month, 25th month, 37th month and 61st month. Data from the Insurance Regulatory and Development Authority of India’s (Irdai) Handbook of Indian Insurance Statistics show that the 61st month persistency for life insurers in 2019-20 was 38% as compared with 35% in 2016-17. Persistency ratio is calculated on the basis of the number of policyholders paying the premium divided by net active policyholders, multiplied by 100.

Surrender value by insurers
Life insurance companies reported an increase in payout because of surrender of policies. In 2019-20, insurers paid Rs 1.22 lakh crore for surrender as compared to Rs 1.11 lakh crore in 2018-19. The state-owned Life Insurance Corporation of India (LIC) accounted for 57.51% of the total surrender payouts. For private insurers, in 2019-20 unit-linked insurance plans (Ulips) surrenders accounted for Rs 38,327 crore or around 74% for the surrender amount paid as compared with Rs 35,949 crore or 86% of the surrender amount paid by private life insurers in 2018-19.

Only products such as endowments and Ulips that have a savings component will partly return the amount invested for a life cover. However, a term plan on surrender lapses and no money is paid to the policyholder.

Tax benefit reversed
Premiums paid for life insurance—first year or renewal—are eligible for tax deduction under Section 80C of the I-T Act for up to Rs 1.5 lakh a year. However, if the individual surrenders the policy within two years, then the deductions claimed in earlier years would become taxable in the year in which the policy is discontinued. Apart from the tax outgo for discontinuing a life policy, the insurance company will also deduct the full amount of the premium if it is discontinued after one year. If one surrenders after year two and three, then the insurer will pay back only 30% of the total premium.

Insurance for protection
Buying an insurance cover is protecting one’s family in the long run. The total sum assured of all life policies put together must adequately cover one’s dependents in the long run, should something happen to the breadwinner. Continuity in life insurance would enable a policyholder to reap the benefits of the policy as according to the Insurance Laws Amendment Act, all commitments will be honoured if a policy has been active for three years without any breaks.

Individuals should look at a term insurance plan which provides coverage for a defined period of time. A term plan is a protection product that everyone with assets and dependents must buy to meet the financial needs arising from unexpected tragedies of life. If the policyholder dies during the term of the policy, then the nominee is paid the sum assured. A policyholder can customise the term plan to include critical illness cover, return of premium option, whole life cover and cover for spouse and child education cover among others.

Return of Premium (RoP) of end of the policy tenure is gaining popularity in term plans. In such RoP plans, the insurers pay a guaranteed amount at the end of term tenure, irrespective of the life status of the insured. A term plan with critical illness benefits pays a lump sum amount of money to the policyholder on being diagnosed with major illnesses like cancer, stroke, heart attack or multiple organ failure. A critical illness plan can be bought as a rider with the term plan for comprehensive protection. Term plans can protect the income of the life insured in the case of disability because of a critical injury. So, if you are planning to buy a life insurance policy, stick to a term plan with a critical illness rider to protect yourself and your family.