Voluntary exit from term plan could rob nominee of windfall, say experts

If automatic hike in sum assured is lower than increase in your liability, buy additional plan

Life insurers had an unfavourable claims experience during the pandemic after which reinsurers raised their premium rates. Many insurers will, therefore, hike their term premium rates in December. Some have used this as an opportunity to launch new versions of their term plans with added features.

Voluntary exit option

In its recently launched e-Term Plus Plan, IndiaFirst Life Insurance has offered the voluntary exit option. “Customers can, if they wish, exit the plan either at 65 or after paying the premium for 25 years. They will be given back all the premiums paid so far,” says Rushabh Gandhi, deputy chief executive officer (CEO), IndiaFirst Life Insurance. He adds that this option takes care of the complaint that term plans don't give any money back.

The voluntary exit option is similar to the return of premium option, but is more flexible. In the latter, money is paid back only at the end of tenure. Here, the customer can avail of the exit option any time after 65 or after paying the premium for 25 years.

Avail of the voluntary exit option only if you are in dire need. “What you would have is a large cover at a premium fixed 25 years or so earlier. In case of an eventuality, your nominee will get a huge sum, so it is not advisable to give up the policy,” says Naval Goel, chief executive officer (CEO), PolicyX.com.

Flexibility to alter sum assured

SBI Life’s eShield Next and Indiafirst Life’s e-Term Plus allow customers to increase the sum assured by a fixed percentage (5-10 per cent of basic sum assured) annually till it doubles. This option enables customers to increase their sum assured automatically so that it keeps pace with inflation and their own rising incomes.  

Instead of going for this feature, customers can buy a new policy to increase their sum assured. “But you will have to undergo fresh underwriting. With age, the chances of a policy proposal being rejected rise,” says Gandhi. This risk gets more pronounced from the 40s.  

According to Goel, “When you buy an increasing cover policy, you lock into today’s rate. When you go for a new policy, you pay the rate prevailing then.” If premium rates are on the uptrend, as is currently the case, you will end up paying more. But if premium rates are declining, as was the case for many years in the past decade, you could get additional cover at a lower rate.

e-Term Plus also offers the option to reduce the cover: The sum assured is high initially and then declines by a fixed percentage annually. It also offers a balanced cover option where the sum assured increases annually during the first half of the tenure and declines during the second half.

“After a certain age, a person’s liabilities reduce. The reducing and balanced cover options can prove handy then,” says Rakesh Goyal, director, Probus Insurance. These options can be taken by people who have a good estimate of when their liabilities will start reducing. They are also likely to be more cost-effective than the increasing cover option. Purchasing more than one policy (in the 30s) will, however, allow customers greater control. They can stop one when their insurance needs reduce.         

Insurers also offer automatic increase in coverage at important milestones: marriage, house purchase, and children’s birth. Even if you have a plan that hikes the cover automatically, check whether the hike has kept pace with your increased liability. For instance, if you buy a house for Rs 1 crore but your existing policy’s sum assured jumps by only Rs 50 lakh, buy a new policy.           

The bottomline

While these features can make term policies more customer-friendly, look for three core characteristics. “The insurer should be stable, its claim settlement ratio should be high, and its premium rate should be competitive,” says Goel.

 Ideal sum assured is linked to interest rate

• Treat term insurance as an income-replacement product

• Suppose a person’s current income is Rs 20 lakh

• Let us assume his dependants are not financially savvy

• If he passes away, the dependants are likely to place the money in a fixed deposit

• The highest interest rate one can get on State Bank of India’s term deposits today is 5.4 per cent (6.2 per cent for senior citizens)

• One needs a sum assured of at least Rs 3.7 crore to generate an annual income of Rs 20 lakh (at 5.4 per cent)

• Thus, when interest rates decline, the sum assured one needs to buy increases