Published in Mint on 6 October, 2015, Written by Abhishek Bondia
Are there any differences in critical illness riders of various insurers?
—Jayant S.

There are differences in critical illness riders. First, the number of illnesses covered under critical illness vary substantially. On average, plans cover about 10-12 critical illness. On the lower side, plans cover only four illnesses. On the upper side, stand-alone plans cover up to 30 illnesses. Second, the cost of riders vary across insurers. There may also be differences in other features such as the survival period to claim benefits or the number of years pre-existing diseases are excluded.
Is there a limit on the number of switches in a policy year?
—Gautam Nag

A switch in case of a unit-linked insurance plan (Ulip) is transfer of money from one of the underlying funds to another. Most plans do not put a restriction on number of switches. However, they restrict the number of free switches. A general practice is to allow up to four free switches. Thereafter, they charge Rs.100 for every transaction.
What is human life value (HLV)? How it is determined?
—Karthika Jain

HLV helps estimate the amount of risk cover one should take. It is an estimate of financial impact on the person’s dependants, in case of her death. A term life insurance taken for the amount of HLV ensures that dependants’ financial well-being is secured.
HLV is measured in different ways at various levels of sophistication. Primarily, it depends on person’s current income, expenses, current investments, expected return on investments, inflation, number of active years of employment and outstanding liabilities.
A discounted value of a person’s expected net income (income less expenses) for the number of active years of employment is considered as base. Thereafter, all outstanding liabilities are added and current investments are reduced. The resultant figure is considered as the HLV.
This method of calculating HLV is complicated which is why several other thumb rules can be used to estimate the life insurance needed.
One such approximation is to estimate the desired amount of life insurance as 15 times a person’s annual income. Another approach is to determine the major expenditures in the future such as a child’s education or marriage, and purchase life insurance that pays for these major expenditures if a person dies. I prefer the multiple of annual income approach because it is simple and effective in setting the right level of cover.