Financial Daily from THE HINDU group of publications
Sunday, Sep 15, 2002
Financial Daily from THE HINDU group of publications Sunday, Sep 15, 2002 |
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Investment World
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Life Insurance Money & Banking - Life Insurance Term assurance policies — Roof over your risks Sanjiv Shankaran
TERM assurance policies are the most basic insurance policies that one can get. They seek to provide a financial cushion to a policy-holder's family if he fails to survive the term of the policy (for more details, look at the Personal Finance section of August 11 and August 18). How can term assurance policies be tailored to provide the least expensive insurance package for a person who has taken a housing loan?
Small is ideal
During the tenure of a housing loan, the borrower repays a portion of the loan each year. Correspondingly, HDFC Standard's loan cover policy brings down the amount covered every year. Consequently, the loan cover policy is less expensive than a term assurance policy of the same duration. A single term assurance policy may be inappropriate when one takes a housing loan. However, when a term assurance policy is broken down to smaller sizes in order to cover a housing loan, the effect is dramatic.
To illustrate, consider Table 1, which looks at the way a term policy can be used to cover an individual who has taken a Rs 50 lakh housing loan for 20 years. As indicated in the table, a borrower can take three term policies of varying duration. The idea behind three policies is that as the size of the housing loan reduces with time, one term policy after the other can be discarded. The implication of breaking the term policy into three packages is that the cost of the policy is tailored to meet the size of the housing loan at the end of each year. Table 2 gives the premium rates on HDFC Standard's loan cover policy for Rs 50 lakh over a 20-year period. A comparison of both the tables brings out the lower cost of premium if one opts for a term assurance policy. The condition, of course, being that the term assurance policy is broken into packages to cover the loan.
As Table 2 indicates, term assurance policies of three insurance companies, Max New York Life, HDFC Standard and ICICI Prudential are all less expensive than HDFC Standard's loan cover policy for the same amount (the list of companies offering term assurance policies is not exhaustive; the table is used merely to explain the possibilities). <>Suitability>: On a stand-alone basis, term assurance policies are useful. They perform the most essential function in insurance. Used with some imagination, term assurance policies can be an effective cushion in other areas too. What is likely to be the biggest fear when one takes a loan? Fear of repayment, perhaps, in the event some misfortune befalls a borrower. In this context, properly packaged term assurance policies can provide the best possible cushion. Savings (refer Tables 1,2 and 3) provided by term policies are also significant. Companies offer single premium term assurance policies too, wherein, a one-shot payment is collected for the entire duration of the policy.
As the example indicates, single-premium policies are less expensive in relation to annual premium payment. Properly packaged, the term assurance policy is the best cushion one can get.
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