This article on whether and how to split your term insurance plan is perhaps the most important article for a term insurance buyer, especially if it is their first term insurance plan. The situation of too much or too little insurance cover is very common for many term insurance customers, and unfortunately both are bad situations to be in. So we recommend you read this article on splitting term insurance very carefully – it will surely be worth your time.
There are ek, do, teen – 3 ways to split your life insurance cover.
1 : Splitting your Term Insurance Plan based on Time
Your term insurance needs are not always constant. That’s because your income, lifestyle and life stages, and therefore the amount of income protection you need, keep changing over your earning years. So you needs start low when you are early in your career and life stage, keep going up as your income and needs grow and it reaches a high when your responsibilities and economic worth are highest. As you approach retirement (and have accomplished a large part of what you were supposed to contribute monetarily to your family), the level of insurance protection you needs comes down and ends when you retire.
Look at the table below to understand it. (Click on it to see it full screen)
Simply put, 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, or till 60 if you can get it. Since you are young, this term insurance plan will be very cheap.
- 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 and your cover level is high.
- In Stage 3, as you approach 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, your life insurance protection is maximum and adequate to cover expenses for your family in case something were to happen to you. Also, you will now be paying premiums for 3 term plans, but since your salary is high as well, you will be able to afford the premiums easily.
And you don’t need life insurance cover for Stage 7, i.e. beyond retirement. Know why.
2 : Splitting Term Insurance Plan based on your Needs
Splitting your term insurance plan based on Needs is the most important reason of all.
This kind of splitting works best if you are buying life insurance to cover debts such as home loans. 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.
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 – continue this policy till all EMIs are paid off in 16 years. And in case the loan is paid off earlier, just stop paying premium for this policy. Simple.
3 : Splitting Term Insurance Plan between Insurance 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 death from a terrorist attack, while some others don’t. You may want to split between companies to accommodate both the benefits. That’s ok.
We hope this article gave you a good perspective to buy your term insurance plan. Make sure you read these points carefully before you fill up the application form.