Additional insurance policies?

Question: I read the article ‘Cover your risks well while buying a house,' in PropertyPlus, Nov.12. Are you suggesting that we go for additional insurance policies in the illustrated case? You have quoted Mr. Venkat's new purchase of a flat as an example. I feel he has to shell out more money by contributing for a risk cover.

I have one more query. If my combined income is Rs. 1 lakh per month, am I justified in going for a site costing around Rs. 60 lakh?

Selvarajan, e-mail

Our panellist, Balaji Rao, replies:

Answering the first of your queries, it is like seeing a glass half-full or half-empty. If you see this as an expense which may or may not yield any returns you might feel it could be an additional payment. It is not about “shelling out” more money; it is about covering the risk at an affordable cost.

Recently a client of ours who was 44 years old died of a cardiac arrest. He had taken a cover for Rs.52 lakh including his housing loan liability.

The insurance company reimbursed the sum assured. At the time of his death he had a liability of about Rs.9 lakh towards his housing loan which we helped his family to repay and got the house cleared from the mortgage.

His total premium outflow was about Rs.1 lakh until the time of his death and the financial compensation his family received I am sure is good enough and acceptable to even the worst of cynics.

It is easy to perceive the payments we make towards our risk cover as waste when we are alive and presume we will live forever and that we are immortals. The only thing certain about life is that ‘life is uncertain.'

On to your next query. You wanted to know if you can take a loan to purchase a site worth Rs.60 lakh given your income is Rs.1 lakh per month. To arrive at solutions, certain information is necessary.

Aspects such as your present age, dependants, if your income is stable, your loan liabilities, your EMI commitments (if any), how many years you plan to work (earn at least the same income), is your plan of buying this site for investment purposes or to build a house and live there eventually etc.

If you are in your 30s and have no major liabilities you could perhaps go for a loan.

Assuming your bank would offer you 70 per cent loan on Rs.60 lakh, which would be Rs.42 lakh, at the rate of 12 per cent p.a. you would have to pay an EMI of Rs.50,407 over 15 years.

But I doubt if a bank could sanction a loan to you for such a long tenure. Hence, you have to see your monthly outflow capacity and your current lifestyle and then decide if it makes sense to go for a loan which looks pretty enormous.

About paying premiums

Question: This is with reference to your article last week (‘Cover your risks well….)

The like of Venkats examine the type of policy offered to cover the risk factor alone.

On maturity of loan (loan period), nothing comes to them. As the loan period commences and advances, the risk factor of payment of loan balance comes down. For the remaining period are we not paying something more than the loan repayment due for which the insurance is taken?

Another factor is that life premium after 1956 has never undergone a change and hence the premium for the risk factor must be higher. If that is ascertained and proved, the policy can be linked to bonus and if need be by a token extra premium to cover this additional benefit.

What Venkat will then get after the loan period of 27 years is a lump sum amount by way of bonus declared for the said period, though he may not get back the premium paid which is considered as pure risk premium only.

This is the area that life insurance companies should understand and make the policy holders smile. There can be an offer of two types of policies: one that is explained in detail by you and the other on the above lines.

Hariharan, e-mail

Our panellist, Balaji Rao, replies: I appreciate your concern. Insurance industry is in a growth phase in India where we are in the process of seeing various changes and in the future too we are going to witness many more changes which would benefit the insured individuals.

The changes may happen faster if people start insuring adequately across all age groups.

Unfortunately, only people in their 40s and 50s are aggressively opting for insurance cover rather than the younger generation whose premium payments make the insurance industry offer better products.

The fundamental aspect about term assurance is that it should not be construed as an “investment”.

This particular type policy is completely different from our regular endowment or ULIP or a money-back policies.

Term assurance as a product is purely for the purpose of risk cover without any investment attachments. If we look at the premiums that we pay on the sum assured, the financial compensation is quite good. Of course, such compensations are paid only upon the death of the policy holder.

Interestingly, same rules are applicable for vehicle insurance or a health insurance where there is no investment attachment but are availed only with an expectation that we might need the funds during an accident or an ailment. If we have no problem paying our premiums regularly, even though we might not have accidents or hospitalisation for an extended period of time, then why should we worry about term assurance which is almost a replication of vehicle or health insurance?

Since the insurance companies have designed term assurance as a non-investment product the premium charges are very low compared to a pure investment product.

Even the charges are very efficient while the same is comparatively higher for other investment-based products. But being an optimist I look forward to see some changes in this connection with some innovative thinking by the product manufacturers in the future.