Term plans most economical way to get life insurance

Published in Mint on 14 July, 2015, Written by Abhishek Bondia

I will be shifting to the UK in another five months. I already have a life insurance policy from a private insurer in India and have been paying the premiums. Do I need to take a new policy in the UK or will this be valid there as well?
—Devina Paul

The current life insurance policy will remain valid. You need not take a new policy in UK. The policy will remain denominated in Indian rupees, i.e., premium, and claim will be paid in rupees. If your income has increased substantially then you could consider enhancing your sum assured.

How good is life insurance as an investment or a tax-saving instrument?
—Satrupa Chatterji

A life insurance policy is best seen as a protection tool. I generally recommend managing protection and investment through separate instruments. If you still want to merge the two, unit-linked insurance plans (Ulips) serve as a cost-effective tool. Ulips have an upper cap on the administrative charges, which allows a large proportion of premium to be invested. This results in better returns for the investor.
Term insurance as well as investment plans are eligible for tax incentives. In terms of tax saving, insurance plans are one of the most effective instruments. These are EEE instruments, i.e., exempt at the time of investment, exempt on income generation, and exempt for withdrawal, with a relatively lower lock-in period of five years.

I am 24-year-old and have just started working. I have been told that is good to buy a life insurance policy when one is young. Why is this so?
—Kamini Nambiar

A life insurance policy is a long-term contract. The mortality charges are fixed as per entry age of the insured. Once the premium is determined, it remains same for the term of the policy. So, the premium for a 24-year-old will be significantly lower than a 40-year-old. Also, the financial implication of death of a young person is substantial on the family. At a young age, individuals do not have much personal estate that family can bank upon. As one grows older, people do build personal assets that can be disposed to take care of financial obligations. Finally, if you were to fall ill as you grow older it will be harder to purchase insurance at standard rates. I strongly recommended that you buy your insurances as early as possible.

Is term insurance more economical than other life insurance plans?
—Ambika Pillai

Yes. Term insurance is meant only for protection and is the most economical insurance for protecting against early death. It is not linked to any investment plan. Traditional endowment and Ulips have a mix of risk cover and investments. So, the ticket size of a term insurance for a similar sum assured works out much lower than other life insurance plans.

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