Term Insurance Plan — 3 Reasons you should Split it
This is perhaps the most important article for a term insurance buyer, especially if it is their first term plan. There is this common situation of too much or too little insurance cover that many customers land into — both of which are bad situations. So read this article carefully — we believe it will be worth your time.
There are ek, do, teen — 3 ways to split your life insurance cover.
1. Splitting Term Insurance Plan OVER TIME
Your term insurance needs are not always constant. That’s because the amount of income protection you need keeps changing over your earning years.
We’ve tried to explain this in the table below.
Splitting of Term Insurance Plan India
Simply put, for your income protection, you need up to 3 term insurance plans during your lifetime.
Buy your first Term Insurance Plan with basic life cover during Stage 1 when you start working and are single — from age 20–27 to go on till Stage 5, i.e. till age 51–55 years
In Stage 2, as you settle down in your career and also get married and have children, buy another term insurance plan with bigger cover that covers you till Stage 6, i.e. your retirement age. You are now protected with 2 term plans.
In Stage 3, once you are approaching the peak of your career, buy yet another term insurance plan with an even bigger insurance cover once you are clear how much you need at the maximum level. Again, buy for a period till retirement.
Notice that between ages 38 and 55, you life cover will be maximum because all 3 term plans will be active.
2. Splitting Term Insurance Plan BASED ON NEEDS
The most important kind of splitting that you should give a serious thought to.
Specifically when you are buying term insurance plans to cover a debt such as a home loan, this kind of splitting works best. In such cases, since you know that you will be paying off your debt over time, it is better to have separate term insurance plans for each large debt so that when the loan is paid off, you term plan also ends or you can stop paying the premium for it.
e.g. Term Insurance Plans required for my income protection = Rs. 75 lakhs.
Home Loan (outstanding today) = Rs. 42 lakhs, EMIs to be paid for balance 16 years.
Term Insurance Plans to be split as follows:
Policy 1 : Rs. 75 lakhs till retirement
Policy 2 : Rs. 42 lakhs for 16 years — in case the loan is paid off after say 7 years, simply stop paying premium for this policy. Otherwise continue till EMIs are paid off in 15 years.
3. Splitting Term Insurance Plan BETWEEN COMPANIES
Of late, we keep hearing that we should split our term insurance plan between companies so that just in case one company doesn’t pay the claim, the others will.
Our view is simple — there is only one set of rules that govern our life insurance companies, and enforced by the IRDA. So it is highly unlikely that the decision on your claim will be different from different companies.
Also, when you apply to 2 companies simultaneously or serially, you have to disclose that you already have life cover from another company, or are applying for it. So each life insurance company knows that another company is also involved. At the time of claim, nothing stops these companies to speak to each other and jointly decide the fate of your claim. Normally, the reasons for claim acceptance or repudiation (denial, rejection) are the same across all insurance companies.
So as long as you have been truthful and accurate in whatever you mentioned in the application form, buying your term insurance plan from just one company is good enough. It also saves the headache of applying to different companies, doing medicals many times over, paying renewal premium for each policy every year, and a lot of hassles for the nominee when applying for a claim.
However, you can split the term plan between companies for a specific product benefit inclusion/exclusion. e.g. some companies cover terrorist attack, some others don’t. You may want to split between companies to accommodate both the benefits. That’s ok.