Published in Mint on 9 February, 2016, Written by Abhishek Bondia
I am a 27-year-old man. I am married but do not have children. I earn Rs.8 lakh a year and we have a family income of Rs.15 lakh. I have three endowment policies with a total cover of Rs.35 lakh. Should I continue these?
Endowment policies are a combination of protection and investment. The protection offered in an endowment plan is generally more expensive than a normal term plan. Your total coverage is grossly inadequate. You should buy a term insurance plan of around Rs.80 lakh for yourself and another Rs.70 lakh for your spouse.
The effective yield on endowment policies is low, typically between 3% and 5% for traditional plans.
I recommend that once you have bought the term plan, you can buy pure investment products that can generate higher investment yields.
I missed paying premiums for the past few months. Can I start paying my premium again? Are there any charges?
You can reinstate your policy. Generally, when you stop paying regular premiums, the insurance lapses, but it is possible to reinstate lapsed policies. Insurers typically have pre-defined sum assured thresholds for reinstatement. In case the sum assured is lower than the threshold, fresh medical underwriting may not be required. If it is above the threshold, insurers may ask you to go for a fresh medical check-up.
Revival of a policy requires you to pay interest on the unpaid premium for the lapsed period.
Can I cancel an insurance policy after the free-look period?
After the free-look period, the policy can be cancelled via surrender. In most plans, if you cancel the policy in the first year itself, the premium is written off towards surrender charges. You should look at the policy schedule for the exact charges based on the number of years of paid-up premium.
What is the difference between an accelerated and stand-alone rider?
In life insurance policies, various riders are available such as accidental disability and critical illness riders. In the case of an accelerated rider, the base sum assured is reduced after the payment of the rider amount. So, for example, if the life sum assured is Rs.5 crore and critical illness rider is Rs.50 lakh, then after the critical rider is triggered, the life insurance claim will be settled only for Rs.4.5 crore. If the critical illness rider is stand-alone, Rs.5 crore will be payable on death. Accelerated riders are generally cheaper than stand-alone riders.
In some cases the terminology accelerated benefit is used when a portion of the sum assured is paid in anticipation of death. So, if a person is suffering from a terminal illness that will result in death within six months, then the rider will pay out a portion of the sum assured in advance and the remaining on death.