Costs front-loaded for short-term plans

Buy these if your income stream is not stable

Yateesh Srivastava, COO, Aegon Religare Life Insurance says that for younger customers, the definition of long-term is shortening significantly. So, policies that are of smaller tenures, called limited premium paying policies, are gaining traction.

“Currently around 40 per cent of the policies sold have limited premium paying term and there is a slight increase in the percentage over last year, says Sanjay Tripathy, senior executive vice-president, HDFC Life. If there is uncertainty about the cash flows of customers in the future then there is a tendency that customers opt for shorter investment period. This will ensure they pay early and enjoy benefits for a longer tenure.

 

But there is a downside to it as well. Customers must remember that a lot of the expenses are front loaded in the shorter premium paying products. "Insurance has traditionally been a long-term instrument and is priced accordingly," says Srivastava.

“Many a times, the insurance agent convinces buyers to buy a shorter term premium paying policy, because it is easier for them to sell these products,” says, A S Narayanan, CEO, Reach Alcon Financial Advisors. But the Insurance Regulator Development Authority has taken steps to shift to long-term policies by making them attractive for agents from the point-of-view of commissions.

 

The main advantage of such policies is that being short term in nature they can be used as tax-saving avenues for fresh investors, says S Sridharan, head of financial planning and advisory, FundsIndia.

"There are no negative returns as these policies are endowment in nature. However, the disadvantage is that they offer low returns of just three to four per cent. Even bank savings accounts provide at least four per cent return to investors,'' says Sridharan. He recommends it only for investors who want to save on their taxes, while seeking minimal risk along with their life cover.

These products are useful in uncertain environment when customers don't want to take commitment for a longer tenure and, hence, prefer short-term payment option. The ideal target segment could be businessmen, professionals who have a short period of high income like film stars, sports persons, etc.

 

While customers need to pay for a shorter period, they can still enjoy life cover and other benefits for a longer term. This is suitable for individuals who don't have long-term guarantee in terms of cash flows.

If the policy offers life cover up to 10 times the premium, then it is tax-free on maturity. This is possible in case of a younger person. But for those above the age of 45 years, the maximum coverage is available only up to seven times the premium, hence the maturity value is subject to taxation. This is another reason why such policies are not meant for older customers, adds Sridharan.

Before buying a policy, customers must always ask about the costs, expected returns, cover (whether it offers only death cover or accidental cover also), tax implications and accelerated benefits.