Term insurance plan: Automating increase in sum assured could prove useful

To raise your life cover considerably, buy a second term plan

SBI Life Insurance recently launched a term plan called SBI Life eShield Next. Apart from a level cover option (where the sum assured remains constant), it allows customers to increase sum assured at regular intervals, or when they reach important milestones in their lives. Several other insurers also offer such covers.
 
How do they work?
 
These plans work in two ways. One, the sum assured can increase at regular intervals. In the SBI Life plan, it increases by 10 per cent (all increases are percentage of basic sum assured) every five years, till you hit a ceiling of 100 per cent.
 
In the second option, the sum assured increases at important milestones. In the SBI plan, when the customer gets married for the first time, the sum assured increases 50 per cent (maximum Rs 50 lakh). When he has his first child or adopts one, it rises 25 per cent (maximum Rs 25 lakh), and repeats when there is a second child. When he purchases a house, the sum assured rises 50 per cent (but limited to the lower of home loan amount or Rs 50 lakh).
 
Automatic increases 
 
Younger peoples’ life insurance needs usually rise with time. “Responsibilities grow and inflation also goes up. Such a plan enables a person’s insurance cover to keep up with these changes,” says Ravi Krishnamurthy, president, SBI Life Insurance. An increase in income also requires an enhancement of life cover to preserve the family’s lifestyle.
 
One can always buy a second cover. “But doing so would require the person to undergo underwriting procedures and medical tests. In case adverse issues are found in the test, the individual could be denied an additional cover, or it may be offered at a very high premium,” says Krishnamurthy.

Sometimes behavioural issues prevent a person from buying another cover. “There is a lot of inertia as buying a fresh cover requires considerable time and effort,” says Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India-registered investment advisor.
 
Even if a person does not buy a fresh policy, his growing liabilities will get covered by such a plan, at least partially.
 
Higher premium
 
An increasing term cover’s premium is higher than that of a level term cover. “The premium would be about 30 per cent higher. This would vary from one insurer to another,” says Naval Goel, founder and chief executive officer (CEO), PolicyX.com.
 
The difference depends on age, too. “For a Rs 1 crore cover, the difference in premium at 30 is likely to be small, say, Rs 4,000. At 50, it could rise to Rs 20,000 or more,” says Indraneel Chatterjee, co-founder and principal officer, Renewbuy.com.
 
The increase in sum assured of these policies depends on the passage of time or key life events. Sometimes, the increase may not match a person’s needs. “Suppose a person has a sum assured of Rs 1 crore and then buys a house worth Rs 1 crore. These plans may not fully cover such a considerable jump in liability,” says Chatterjee.
 
Another issue arises when a person’s insurance needs decline. “If you have two policies, you can stop one of them. You don’t have that flexibility here,” says Raghaw.
 
Who should buy?
 
Most younger people aged 27-35 may buy such plans. “Since the difference in premium is not very high at this age, buying such a plan can only help,” says Raghaw.
Middle-aged persons may also go for such plans, despite the considerably higher premium, if their responsibilities are likely to grow. “Once you are past 45, health problems creep up, so such plans can be useful,” says Chatterjee.
 
But those above 50, who have accomplished most of their responsibilities, can avoid them, according to Goel.
 
Even if you buy an increasing cover plan, don’t fall prey to inertia. “Whenever there is an event that requires a large jump in sum assured, buy a second plan,” says Chatterjee.