While investments are typically reviewed annually, risk cover is often left unchanged for years.
As part of the year-end financial review, insurance experts urge individuals to look beyond portfolio returns and reassess a critical pillar of financial security -- term insurance.
While investments are typically reviewed annually, risk cover is often left unchanged for years.
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Is your cover still adequate?
The primary role of term insurance is income replacement.
The cover should be sufficient to help dependants maintain a similar lifestyle in the event of the earning member's untimely death.
"A commonly used starting point is a sum assured of at least 10-15 times current annual income, which can replace lost income for a meaningful period," says Jude Gomes, managing director and chief executive officer, Ageas Federal Life Insurance.
Living expenses for dependants must be projected for the number of years they will rely on that income and discounted to present value.
Term insurance should also function as a debt-clearing tool.
"Ensure the cover is sufficient to wipe out all active liabilities -- so your dependants do not inherit a financial burden that eats into their savings," says Nitin Mehta, chief distribution officer, Bharti AXA Life Insurance.
Future financial goals, such as children's higher education or marriage, require explicit provisioning.
A corpus that appears adequate today may fall short a decade later.
"Factor in inflation by assuming a long-term rate of 5-6 per cent," says Gomes.
When should you enhance cover?
Marriage is a key trigger. "Even when both spouses earn, shared responsibilities rise, warranting a higher insurance cover to protect their future lifestyle," says Mehta.
The birth of a child introduces multi-decade commitments, including education and marriage, and necessitates a substantial increase in cover.
Taking on major liabilities, especially a home loan, is another trigger.
A substantial rise in income is another signal, as the income that needs to be replaced to maintain the family's standard of living increases.
When should you reduce it?
Reducing term insurance warrants extreme caution and is advisable only when a policyholder has achieved true financial zero-dependency.
This implies that major liabilities have been fully repaid, dependants are financially independent, and sufficient retirement corpus, savings and investments exist to sustain the spouse's lifestyle.
"Even then, rising inflation reduces purchasing power," says Vikas Gupta, chief product officer, ICICI Prudential Life Insurance.
Healthcare expenses can escalate sharply with age. A late-life health crisis can significantly drain retirement savings.
Removing the insurance safety net prematurely can leave the surviving spouse financially vulnerable.
"Moreover, increasing cover later in life can be more expensive," adds Gupta.
In practice, many term policies do not permit a reduction in the sum assured mid-term.
"Individuals holding multiple policies can choose to discontinue some in the future to lower overall coverage," says Varun Agarwal, business head - term insurance, Policybazaar.com.
Qualitative checks
Policy tenure should outlast financial responsibilities.
Even if retirement is planned early, children may complete their education and become self-reliant much later. The policy must bridge this gap.
Coverage should also continue until a spouse or ageing parents no longer rely on the policyholder's income.
Nominee details must be accurate and current to avoid disputes and delays at claim time.
"Policyholders should also assess the insurer's claim settlement record, as a strong track record signals reliability," says Agarwal.
Clauses you must understand
Most life policies include a suicide clause with a waiting period of one year from inception or revival.
"If the policyholder dies by suicide within the waiting period, the beneficiary is entitled to receive 80 per cent of total premiums paid or fund value in case of Ulips," says Anup Seth, chief distribution officer, Edelweiss Life Insurance.
After the waiting period, such claims are treated like any other.
"Ensure the nominee's name matches KYC (know your customer) documents exactly.
"Even minor spelling, initials or date-of-birth mismatches can delay settlement," says Seth.
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Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff
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