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How to buy a Term Life Insurance in India

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Now you should be pretty convinced why you need insurance and why term insurance is better than the traditional insurances. Now let’s see how to buy one. Buying term insurance is pretty easy and can be done entirely online. And there are numerous insurance companies which now offer term insurance.

Things to remember when choosing an Insurance company

There are a few important things to keep in mind while choosing a company for your term insurance.

  • Find the premium cost. For the same Rs. 1 Crore sum assured, different companies would charge different premiums. It all depends on their expenses. If the company has a lot of agents to sell their plans, they need to be paid salary and the expenses increase. If the company sells it primarily through online and has 1 office per city, then their expenses are low and thus the premium is also. You should try to get as an insurance plan which has the as low premium as possible.
  • But premium alone can’t be the only factor (else I wouldn’t have put in bullet points). Check the claim settlement ratio of the company. Every year, each company needs to publish the claims which it received and the percentage that was accepted and paid for vs the percentage that was rejected. You can get this info mostly from the company’s website easily and IRDA also publishes this information. Better companies like LIC, HDFC, ICICI, SBI, etc usually have a better claim settlement ratio.
  • Also, some companies/plans have a maximum limit for the sum assured or the policy period. Do make sure you research these too and fits your needs.

What about the extra riders?

These insurance policies have extra features that you can add to the plans – called “riders”. These cost extra and would be added to your premium. Some of the riders are:

  • Accidental Death: If you die because of an accident your dependents get this extra money. Do note that the money one gets from this rider is extra to the sum assured you get from the term insurances. Say you bought a plan for Rs.1 Crore and a 25 lakh accidental death and you die because of an accident, your nominee would get 1.25 crore. If you died of natural causes, they would get Rs. 1 Crore.
  • Critical Illness: If you are diagnosed with a critical illness (listed out in the policy), you would get a lump sum amount for your medical expenses. Eg: If someone is diagnosed with cancer and has term insurance + critical illness, he would get the benefits from this rider, even though he is still alive.
  • Accidental Disability Rider: If you are disabled because of an accident you would get a sum in installments per year as mentioned in the policy.
  • Premium waiver: This rider is useful if for some reason are not able to continue paying your premiums due to disability or loss of income. Eg: if a woman working and has a term insurance + premium waiver rider, stops working, thereby losing her regular income, she will still be covered under the policy even though she doesn’t have to pay any more premiums.

Do remember these riders are not mandatory and most of the cases just term insurance should be enough to cover the most basic needs. If an agent tries to upsell you any of these waivers, ask him to explain it in detail and decide accordingly based on your financial goals and needs.

Many companies also have even more features in their plans. You can check out their websites or call up their agent to get more information about it.

Premium Payment Frequency

Different companies and plans have different payment frequencies like monthly, quarterly, annual or single premium. Usually, it is best to pay it annually as the amount you would end up paying wouldn’t be very high. Please stay away from single premium option, where you would pay the entire premium (a few lakhs) at the beginning itself for the insurance. It significantly reduces the risk for the company and increases your net amount paid.

If you were to die in year 3 of normal term insurance paid annually, you would have paid about Rs.30,000 (assuming Rs.10,000 premium per annum). Instead, if you opted for a single premium option, you would have paid Rs. 2 lakhs (these are rough figures) for the plan and if you died in year 3, the insurance company profits more than your dependents.

Return of Premium

Term insurance isn’t an investment, so at the end of maturity, you (as the insured) wouldn’t get any money from the company if you survived the insurance period. There are however some plans which would return back the premium paid at the end of maturity. So, if you had paid a total Rs. 5 lakhs as premium for 30 years, on the 31st year, if you are still alive, you would get back the Rs. 5 lakhs.

However, the premium for these plans is higher than the normal term insurance, because they now need to save your premium and return it back to you after 30 years. Apart from the increased cost, think about the value of the Rs. 5 lakh after 30 years. It would maybe help you pay your expenses for a couple of months. Is it really worth spending extra to get this kind of low returns?

Instead, buy a normal insurance policy and invest the remaining amount in a better investment product and reap the benefits after 30 years.

Policy Period

Now you may ask how long should one take the policy for? Most financial planners would say “the maximum period you can get”. But, some companies allow you to take a policy until you are 75 years old. So should you take a policy till 75? No. Please don’t do that mistake.

When you are 58 years old, you would have mostly retired and would now have no income (or very low-income). By the time you retire all your debt would have been paid off and your (and your spouse’) expenses would also be very low. Your kids would have been settled in a nice job and are no longer dependant on your income. But since you have taken a policy till you are 75, now you have to keep paying the premium for 17 more years extra. Once you are retired, it doesn’t make sense to spend money on things which don’t return anything (or too risky).

According to me, the easiest way to calculate the period is age at which you wish to retire – your current age. Say you want to retire at 50 (means you should’ve paid all your home loans and be financially secure for the rest of your life) and you are currently 25 years old. Then take a policy for 25 years (50-25). Because when you reach 51, you would have no income (or very low regular income) and would also not have any major expenses too.

All your financial burden is now gone and you would have saved enough money for both you and your spouse to lead a nice worry-free life. No one is dependant upon your income (remember you don’t have any) for paying any loans. So just decide your age of retirement and use that as a guide for the insurance period.

How to search for these policies

The easiest way to find the various companies that provide term insurance in India is to check out CoverFox.com. You just have to enter basic details about yourself and you will be given a list of plans which you can compare. You can even buy it directly from their website.

There are also options to buy the term insurance policies offline through agents. If you are not feeling safe buying online and need more clarifications about the various options and riders, do call an agent and buy from him. However offline term insurance will be slightly costlier than online. But it is better to do it the right way even if it costs a bit more.

Other things to remember while buying the plan

Once you have decided on the sum assured, company/plan, riders you want to add, etc. Now comes the part of filling up the form. If you fill it online or offline through an agent, make sure you disclose everything about yourself to the company – your age, medical history, smoking/drinking habits, any hereditary diseases in your family, any other insurance policies, etc.

Missing out or providing false information for any of these are a sure way to get a claim rejected. Remember, your family would already be affected emotionally by your death and if the claim is rejected, it would push them into an even worse position. So please make sure you fill in the right information in the application form.

Usually when the sum assured crosses a threshold, the companies would want you to take a medical test. They have approved medical centers which test you and send the result directly to the company. If they find any anomaly like higher nicotine levels or blood sugar, etc., they have every right to put you in a higher risk category which increases the premium. So, if you smoke, do mention in the form that you smoke. They will find it out anyway.

You are also required to inform the insurance company if you begin smoking after the policy is issued and they will increase the premium from then. If you didn’t inform the company about your new habit and you die, it would be impossible to get the claim accepted.

But I do have an even better option: Quit smoking. Smoking kills you and also others around you.

Anyway, do make sure you research the different term insurances by this week and buy one as early as possible.

Why you should buy a Term Insurance instead of Traditional Insurance Plans

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Remember in the last post I warned you to stay away from the traditional Insurance Plan agents trying to sell you the various Insurance policies? I am going to list out the various reasons why and also the best alternative for insuring your life.

There is this company called Life Insurance Corporation of India (LIC) and for a long time they had a monopoly on Life Insurances in India. There were many agents of LIC who were selling Life Insurance policies to everyone. There are various products but usually the popular ones are the Endowment policy.

The way endowment policies work is, you pay a monthly/annual premium for a sum assured for a fixed period. If you die before your policy expires, your nominee gets the sum assured. If you survive the policy period, you get the sum assured + bonus.

I just copied some sample numbers from here:

Policy period: 30 years
Premium: Rs. 31,000 per year
Sum assured: Rs. 10 Lakhs (if you die, your nominee gets this)
Maturity amount: Rs. 23.1 Lakhs (if you survive 30 years, you get back this amount)

Now, you might think this is great as you get back 23 Lakhs if you survive which is a great deal of money right? Yes, I agree it is a huge amount – TODAY. But think about 30 years later when you will actually get the money. It isn’t a huge amount.

That is because of inflation. Inflation erodes the value of your money every day. When you were a kid, you could get a notebook for Rs.5. But the same notebook would cost more than Rs.15 today. Things become costly every year and with the Rs. 23 lakhs after 30 years, you would be able to lead your life for only a few months.

The reason so many people put in so much money into endowment policies is these agents make you believe it is an investment for your future. Based on the numbers we see above, this Rs. 9.3 lakh you invest over the period of 30 years (Rs.31000 x 30 years) earns just a rate of 5.4% per annum. This is pathetic considering the rates you could get in every other investment product today.

For comparison (these are the safest investment options you could get in India today):

PPF earns you 8.7%
National Savings Certificate (NSC) earns 8.8%
Fixed deposits earns you 8.5 – 10%
Hell, even some banks have savings account with 6-7% interest rate (FYI, savings account isn’t an investment at all, just a place to park your money for a while)

How much did the endowment policy earn you? a meagre 5.4%

So why the hell do you want to “invest” your hard earned money into a product which can’t even beat most basic savings bank accounts? And this doesn’t even beat inflation.

And in case you die, the Rs. 10 lakhs you get from this policy isn’t going to help your family much, given that you had taken many loans like the home loan, car loan, etc. How is your family going to pay for all these with this Rs. 10 lakhs? Are you sure you insured your life and your family’s financial safety sufficiently?

Lesson for you today: Never mix insurance and investment. 

Yes you read that right. Insurance and investment should never be mixed. If you want to invest your money, put it in some investment product which gives the highest return. There are safer investment options available like the ones I mentioned above (don’t worry, will cover more in the future posts). If you want insurance, ask just for a plain insurance against your life. Never ask for both in the same product.

Term Insurances – cheaper and better

And that is what term insurance does. While the traditional insurance plans lure you with the survival bonuses and investment for your future story and making you live your life not sufficiently covered in case of death, term insurances uses all the premium and just keeps it safe for your family in case you die. There is no investment and there is no return of your money.

Term insurances give you a much higher insurance coverage with much lower costs. For eg: insuring a 27 year old for a sum assured of Rs. 1 Crore (which is 10X more than the endowment policy example we saw), one would pay less than Rs. 10,000 per year (that is 1/3 cost). For 30 years, you would be paying just Rs.3 Lakh and if you die before your policy expires, your family would get Rs. 1 crore which is more than sufficient for most of their needs for the years to come.

Also because it is 1/3 cheaper, the remaining Rs.20,000 per year can be invested in better yielding investments which will also be a source of additional money for you or your family later. The return you get from investing this elsewhere would beat the returns you get from traditional policies and you are also fully covered for your future.

Remember insurance isn’t for saving “your” life, it is for saving your family’s lives after your death. So term insurance is the best form of insurance one can get to fully secure your family’s financial future.

How can term insurance be so cheap?

  • Most term insurances are bought online. So no need to pay for so many offices in every corner of each city in the country. No need to pay for agents for selling the policies, etc.
  • LIC usually invests the premium you pay in various investments like government bonds, shares, etc. This requires fund managers who make sure your money is safe and yields enough returns to give you your bonus + pay for their huge salary + make LIC profitable. The majority of your money goes into making more money for the company than to give you the best return.
    Whereas term insurance doesn’t require all these as all the money is kept liquid so that any claim can be immediately settled.
  • Usually whenever the government offers some stake in public companies for sale, if there are no takers, the government would force LIC to buy up the stake (invest in the companies). Even if the investment is a bad choice, LIC would have to invest as it is controlled by the government.

Are Term Insurances Safe?

So you may ask, if term insurances are safe? Will the company settle claims without any issue? All insurance companies in India come under the IRDA, a regulatory authority, which make sure these companies don’t fail to do their duty. In other words, if you furnished all your details properly (about your health, medical history, etc), these companies can’t reject a claim. Even if they, you can go to IRDA and fight it out.

Now you want to apply for a term insurance. We will see how to choose a good term insurance policy in the next post. And the various things to keep in mind while picking one.

What is Insurance and why you need it

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After you have solved your debt problem and set up automated transfer to pay your loans, the next important task for you is to take a life insurance. If you are the sole breadwinner in your family, then I would say life insurance is mandatory.

So lets see what insurance is and how it works. According to wikipedia “Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment.” In simpler terms, if you lose something valuable (in the monetary sense), insurance is a way to get back the money (at least partially) which you lose.

Types of Insurances

There are various types of insurances. If you crash your car into a concrete pillar, your vehicle insurance would compensate for the repairs. If a thief robs your house while you are enjoying your vacation, your home insurance would compensate for your losses. If you are admitted in the hospital for a surgery, your mediclaim insurance would pay for most of the hospitalization costs.

All of the above examples are instances when you get the money when you claim for insurance. In case of life insurance (which is the most popular form of insurance) on the event of your death, your family would get the insured money. This is important because, when you are dead, your family’s source of income (sometime the only source) stops immediately. And your family now has to make ends meet somehow, without you to support them. This money from the insurance helps them in the time of need.

So how do insurance companies work?

The way insurance companies work is, they collect a small fee called a “premium” every month/quarter/year from you when you insure something. The insurance would have a sum assured value, which would be the maximum amount you would receive when you claim an insurance because of loss. This sum assured will be more than the premium you pay. For eg: For a sum assured of Rs. 1 Crore, you would pay a premium of Rs.10,000 every year. Of course your premium amount would vary depending upon your age and health condition.

But you ask “Is the insurance company nuts to give you 1 Crore? The math doesn’t add up!”. The math does add up if you understand that there are tens of thousands/lakhs of customers for these companies. Lets say there are 1 lakh customers who are healthy and in their early 20s and every year they all pay Rs.10,000. It adds up to Rs.100 Crores, every year.  Lets say on the first year 90 customers die (may be due to accidents or because their health was sooo bad). That means the company has to pay these 90 families, Rs. 1 Crore each. Even after paying this 90 crores, the insurance company still has Rs.10 crore as profit, and this is just for year 1. They would get premiums every year and every year few people would die and the sum assured would be paid to the families.

Of course, the calculation that I made was very crude and simple. But you get the idea. Insurance companies work because the probability of all of its customers dying (or claiming a loss) is very small. And that is the risk these companies are willing to take. So you have transferred the risk (of supporting your family or paying for the hospital bills or repairing your car) to some third party by paying the small premium for it.

Why you need to get a life insurance

Now lets say you are working in a company and get regular salary and decided to buy a nice apartment with a sea view. It costs about Rs.50 lakhs and you pay an EMI every month from your salary. Lets say you die before you could finish paying the EMIs, your family would now have to take over the loan repayment. Or they would have to give up the house and move to a rented house. In most households, it isn’t that easy for a spouse/parent to go to work and earn enough to pay the EMI.

What can you do to reduce this risk? Take a life insurance for yourself with one of your family member as the nominee who will receive the money if you die. You would pay a small yearly premium, which reduces the tension of the financial insecurity your family would be thrown into if you die.

Remember, life insurance isn’t going to save your life when your bike gets hit by a bus from behind. Instead life insurance will save your investments for your dependants after you die. It is going to protect your family by providing financial safety in your absence. That is why life insurance is very important to take once you started earning a good salary.

How much insurance to take?

In the examples above I used sum assured like Rs.1 crore and enough insurance for repaying Rs. 50 lakhs house, etc. You say “But the uncle next door who is a LIC agent showed me insurance plans for Rs. 2 lakhs or Rs. 3 lakhs. Also he is asking me to pay huge premiums every month/year. I asked for Rs.1 Crore coverage and I can’t pay such a heavy premium.”

Please stay away from these agents and ask them to STFU as politely as you can. You could do a much better job of insuring your life using something called as term insurance than these insurances plans these agents suggest. These term insurances allow you to insure yourself for crores by paying a very small premium every year. And the best part, it can be bought online by filling a form and it takes just minutes.

We will see the difference between these term insurances and the other insurance policies these agents try to sell and why term insurance is better, in tomorrow’s post.

10 ways to improve your Credit Score

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After getting your credit score from CIBIL, if you got a good score (anything above 750 is good, above 800 is better) then great. If you have a lower score and if its not because of some mistake on the bank’s part, then you can do improve it by following these 10 simple points. Eventually within a couple of years your score would improve. Better credit score means reduced risk of getting your future loan applications rejected.

1. Never miss payments or pay late

As we saw earlier, payment history has a weightage of 35% on your credit score. So make sure you don’t miss your loan payments. Many of my friends just pay the minimum balance of their credit card every month, thinking they can pay it off later. But it is a very, very bad idea as you will be paying a huge penalty – both in terms of money and credit score.

Make sure you setup automatic payments of your home loans, car loans, personal loans and credit card bills so you wouldn’t forget a month’s payment. Make use of technology and pay your bills through online if possible. If you have to use cheques, make sure you issue the cheque a few days before the payment date.

2. Don’t have many credit cards

Having many credit cards isn’t something to be proud of. The more credit cards or loan you have, the more credit hungry you are in the eyes of the lenders. They would be very careful to approve your loan application. Also more number of credit cards you have, harder it is to keep track of it.

If you have more than 2 credit cards, increase the credit limit of two good cards (with the most features, benefits and lowest fees) and close the other card accounts. But be sure to not close them down tomorrow. Close them down gradually – don’t use these cards for a few months and then call your bank and close the account.

Closing all your credit cards immediately can also be a negative. Having few cards which aren’t used for a long time means, you can handle your finances without any external help/money which is a good thing if someone needs to lend money.

3. Keep your balances low

Make sure you don’t use up the entire credit limit of your card. If you have a credit limit of Rs.1,00,000 and if you use up Rs.90,000 every month, it means your credit utilization is at 90%. Higher the credit utilization, lower your score – because if the eyes of a lender you are not having enough money to buy using your cash and instead you resort to using a credit card. Mostly try to use your debit card for daily expenses. I use my credit card only for some big purchases like electronics or payments on international sites.

Also the usage on number of credit cards also play an important role. Lets say you have two credit cards both with a credit limit of Rs.1,00,000. You use up Rs.90,000 on the first card and don’t use the second card at all. Which means your credit utilization is 90% and 0%. Instead spread your utilization across to the two cards. Spend Rs.45,000 on both the cards and your credit utilization drops to 45% instead of the 90%.

4. Maintain a healthy mix of credit

If you have just a few credit cards, then it would be hard to have a good score. Instead have multiple types of credits – like home loans, car loans, personal loans, education loans along with a few credit cards. Of course, credit cards are the easiest way to start improving your credit score when you are starting. But do make sure you have other types of loans too. Which brings us to the next topic.

5. Lower your unsecured credit

Credit can be classified into secured credit and unsecured credit. Any money which is borrowed without any collateral and which you can run away with tomorrow is unsecured credit – eg: credit cards, personal loans. And money which has collateral or is secured with another asset is secured credit – eg: home loan, car loan, education loan, etc.

Having a higher percentage of secured credit means you won’t run away with the money. You can run away without paying your home loan, but the bank can sell off your house and get back their money. Try to have a higher percentage of secured credit than unsecured credit. You look safer in the eyes of the banker.

6. Don’t apply for lot of loans

Every time you apply for a loan or credit card, the bank/lender queries the CIBIL database for your records and this query is recorded. The more queries banks make for your records, the more loan/credit you are applying for. Which means you are a high risk applicant. The way to get more credit (money) is to act as if you don’t need the money. It works for everything in life – girls, money from banks, money from VCs, a new job.

And please don’t apply for loans if you don’t need it. Lot of banks make it pretty easy to apply for a “pre-approved loan” whenever you use an ATM. Don’t apply for all loans you could get your hands on, unless you need them badly.

7. Don’t be a guarantor for everyone

Whenever your friends or colleagues apply for a loan, they might ask you to become a guarantor. Choose who you sign for carefully. You don’t want to guarantee for everyone as whenever they default on their loans, you are held responsible and naturally the bank will get the money from you. Also your credit score will take a hit. Also never give your identity/address proofs to anyone as it is easy forge a signature if one is very desperate to get a loan. It is bad being a guarantor for a bad loan, it is worse being a guarantor without even knowing you are one.

8. Monitor your joint accounts

If you have a joint account (loan or credit card) with your spouse, make sure you monitor them monthly. Don’t let a free reign on money matters. If your joint account holder misses a payment or spends too much, your score will go down. Take charge.

9. Longer credit history is better

It is better to have a longer credit history as banks will generally feel safer if they know you have been paying all your loans regularly and closed your previous loans properly. If two friends ask you money and you know the first friend right from school and then second only after you joined the new job three months back, who would you be ready to give money to? Banks also think the same.

10. Never settle your loans/credit cards

Many people when they feel that their debt situation is going out of control, either run away from their house without repaying or settle the account with the bank by paying a small amount.

If you choose to run away your loan is “written off” meaning the bank marks it as a loss, but you credit score takes a major blow. If you choose to “settle” the loan, by agreeing to pay a smaller amount with the bank, then also the bank informs CIBIL that the loan was “settled” and you credit score takes a plunge.

In both cases you can be sure to never get a loan for a long long time. No lender would even touch you with a 10 foot pole.

Instead of these two options, always choose to pay off your debt. Talk with your banker and negotiate a better rate of interest or a longer duration so that your EMIs will be lower. Most bankers would agree as long as you show a genuine effort to repay their money.

The best way to save money is to not spend more money than you earn. It is pretty simple, but not many realise it and end up with huge debt. Make sure you remember these 10 points whenever you take out the credit card at the restaurant or apply for a loan just because you get instant money.

How to get your credit report online – in minutes

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cibil-logoYesterday we saw how your credit score and credit report is important if you want to apply for a loan or credit card in the future. It is very easy to get your credit score by applying online and it costs just Rs.470. In fact it is recommended that you regularly check your credit report at least once a year.

1. Fill the online form

Go to the CIBIL application form page and fill it up. It just asks for basic details like your name, address, phone numbers. You also need to have one Identity proof and one Address proof. Could be your PAN card, passport number, Driver’s license, Voter ID, Telephone Bill, Bank statement, etc.

The last part is your Loan account number. If you have a credit card, you need to fill it with your credit card number. You can fill in a maximum of 2 account numbers. This is used to search for your particular information from the CIBIL records.

2. Online payment

Once your have filled the form, click to button at the bottom of the page to be taken to the online payment page. You will be redirected to a online payment gateway and be charged for Rs.470. After payment, you will be redirected back to the CIBIL page and make sure you note down any identification ID or reference numbers you find on this page.

3(a). Authentication

This is where CIBIL asks a few questions about your loans or credit cards. Just simple 3-5 questions where you need to choose the right one from multiple options. Eg: the bank providing the credit card, loan provider, etc. There shouldn’t be any problem with this step unless you have amnesia about any money you borrow.

Once you have answered this, you will be redirected to the final page which will have your credit score and the credit report which you can download. When I tried to get my report two months back (May 2013) the page just had a spinner wheel and didn’t load. But using my awesome HTML skills (just look at the URL of the final page) I found out my credit score. And almost immediately I received an email with the credit report in a PDF file (password protected zip file). The instructions for the password are available in the email.

3(b). Authentication not successful

If for some reason the authentication isn’t successful, you don’t have to worry and you don’t have to pay again. You just have to authenticate it via snail mail. You just have to send the payment receipt, self-attested photocopies of the Identity proof and address proof and mail it to CIBIL. You will get back the report in a few days.

4) Verify your credit report

It isn’t just enough if you see your CIBIL score. You need to read through the credit report and check if all the information present in it are right. It lists all the loan or credit card account you have, your payment history (upto 36 months), status of the account, enquiries that any bank makes about your credit report, etc.

Read through each section carefully and if you find anything fishy or wrong, take it up with your bank and ask them to send the right information to CIBIL. If your history is correct and your credit score is still bad, there are a few ways to improve your score. It is a gradual process (may take a few years) but it is important you have a good score. I will write up a post in the future on tips to improve your credit score.

Simple isn’t it. Make sure you go ahead and get your credit score today and check if everything is right.

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