Covers Of Comfort

Many people who wish to obtain insurance at a young age may buy a pure term cover as it offers a large sum assured at a lower cost. However, as one progresses in life, one may feel that a pure term policy is not fetching any returns. At the other end of the spectrum, there are investors who are keen on building a retirement corpus, but are unable to buy an endowment plan. Convertible term plans serve as a middle ground between pure protection (term plans) and investment objectives (endowment plans) - the individual is covered and also has the assurance that she/he can convert it into an endowment plan when required.

Under the convertible term plan, a policyholder signed up for a simple term insurance cover is allowed to convert the same into another policy with an investment component, after a specified time. The key being, for the same underwriting, the insured will get to enter a new policy. Therefore, when the insured decide to convert the policy into say a ULIP, the premium is likely to be lower than for a fresh policy. This is particularly relevant as health parameters change considerably between the age of 30 and 40. 

Hence, the premium payable if the decision to obtain a policy is delayed by a few years could be significantly higher. For instance, a 30-year-old individual buying a pure term cover of Rs 50 lakh for a period of 25 years may have to pay an annual premium of around Rs 15,000. If the same plan was delayed by five years, he would have to pay in excess of Rs 20,000 as premium every year. However, thanks to the mindset of wanting the insurance policy to create wealth in addition to providing protection, some may feel tempted to postpone the decision till they are able to afford the premiums that ULIPs or other endowment policies command. Convertible policies could help bring such undecided individuals into the insurance fold earlier in life. 

A counter to this reasoning is that the premium that such policies entail may not be commensurate with the value of cover extended to the insured in the initial years. For instance, while Max New York Life’s five-year renewable and convertible plan prescribes an annual premium of Rs 24,350 (for a 30-year old male seeking a Rs 50-lakh cover) over five years, the company’s level term plan will offer the coverage for the same period for just Rs 10,850. Although it could appeal to those who are unable to afford high-premium policies for the time-being and want to settle for pure protection in the meantime, it may still prove to be an expensive proposition.

In this context, a question that one needs to ask is what is the kind of insurance portfolio one needs to build over one’s lifetime. Experts advise having a mix of plans - term, endowment, and whole life - to meet your insurance needs. The solution is to plan your cover the way you would plan your investment portfolio. For example, an endowment plan bought today should take care of future expenses - say, your child’s higher studies - on maturity. If you can’t afford an endowment plan of your choice, you should buy an endowment plan that suits your pocket and back it with a term or whole life plan. 

In a nutshell, don’t bank on term plans alone because the premium goes up over the years, and could prove too expensive. Your age and medical condition in later years could inflate the costs beyond your capacity to pay. Only a fixed premium plan over a longer term would save the day for you. Convertible plans are one way to bridge the gap.[PAGE BREAK]

Covers On Offer

Pure Term Plans: Offers the largest cover at the lowest cost. There is no monetary benefit if one survives the term, that is, at maturity, the policyholder does not receive any money. Such policies are best if one requires high insurance for a low premium at a young age. 

Convertible Term Plans: Premiums are somewhere between term plans and ULIPs. At the end of the specified period, the policyholder can convert the plan into an insurance policy with an investment element. Such policies are best if you are unable to afford ULIPs at present, but hope to get into one in the future. 

ULIPs: The most expensive form of insurance. The maturity proceeds would be higher than the sum assured or the fund value at maturity. Such policies are best for those who do not have the time to continuously monitor their investments and find comfort in combining insurance and investment objectives over the long term.