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Published in Mint on 26 May 2015, Written by Abhishek Bondia

How should one decide the tenor of a life insurance policy?
—Deepti Kumar

The tenor of a life insurance policy should be based on the underlying goal. For instance, in case of a term insurance plan, the goal is to replace income flow. So, you should look to cover yourself till retirement. You could shorten the tenor if you feel that all liabilities will be settled much before retirement. Consider mortgage, children’s education and marriage, parents and spouse maintenance as some of your liabilities.
In case of a unit-linked insurance plan (Ulip) or an endowment plan, the tenor should be based on investment goal. The tenor is the number of years in which the planned annual contribution leads to the expected corpus at the end of the plan.

I have not paid a premium for some time. I want to discontinue my policy. Do I get anything back from the insurer?
—Priyanka Jain

If you discontinue a life insurance policy, you become eligible to get a surrender value from the policy. However, the surrender value varies by policy type.
Most term life insurance policies have zero surrender value. So, in the case of discontinuance, you would not get any money back. Only term plans with a return of premium option carry a surrender value.
Ulips offer a surrender value, which is equal to the market value of the current units held. In the initial years of a Ulip, there would be a surrender charge that would be levied by the insurer. In the case of an endowment plan, the surrender value is determined based on a pre-defined formula specific to the plan.
The surrender value in most endowment plans is negligible in the initial years.

What is the difference between critical illness plans offered by general and life insurers?
—Sarah Jacob

Critical illness plans are offered by all three kinds of insurance companies—life insurers, general insurers, and stand-alone health insurers. Critical illness plans offered by life insurers are distinct in four ways.
First, life insurers’ policies are long-term contracts, whereas other insurers offer annually renewable policies.
Second, the life insurance policy is valid only until the term of the plan. Plans offered by other insurers are life-long renewable.
Third, premium in life insurers’ policies is fixed for the term of the contract. Other insurers’ price increases with age. Typically, general and stand-alone health insurers charge premium according to the age slabs. For example, the 36–45 age group carries the same premium. So, if you take a policy at the age of 36, the premium remains the same till 45 years of age.
Fourth, some insurance plans offered by life insurance companies may have an option of return of premium in case no claim is made. Plans offered by general and stand-alone health insurers do not have this option.
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