(category)Personal Finance

EP41: Term Insurance - Why and when do you need it?

Vashistha Iyer

Capitalmind Podcast on Term Insurance



Episode 41 - Deepak sits down with returning guest Ruchir Kanakia, the founder of the insurance distribution company OneAssure to discuss our favorite insurance product - term insurance.


  • How term insurance works for you and the company that sells it to you
  • Debt or Dependents - the two reasons to buy term insurance
  • How Covid and the fact that a handful of reinsurers control everything has made your office insurance a bit less reliable - consider buying a personal one too
  • How much coverage is enough and how much the insurance company will give you
  • Why you should opt for the in person medical test
  • You’re tech or finance savvy but consider getting an agent or distributor if your dependents might not be
  • Common riders and why you should ignore them
  • How the claims process works and benefits of selecting a monthly or yearly premium payment

Full Transcript:

Deepak Shenoy: Hi and Welcome - This is Capitalmind's Podcast Episode 41. Today we're going to talk about term insurance and we have with us a guest who's been with us before. Today we have Ruchir Kanakia [who is] the CEO and Founder of OneAssure.in. He was with us - we had a podcast together on insurance. I think episode 32 last year, roughly about September of 2020, it's nearly September 2021. Welcome, Ruchir, to the show.

Ruchir Kanakia: Thanks Deepak for having me.

Deepak Shenoy: Awesome. So we have a lot of this to discuss about a subject we keep talking about at Capitalmind, primarily around the concept of  [how] insurance is not investment. Don't invest for the concept of insurance, but what you should do is actually insure yourself. The viable option we tell everybody is term insurance, but obviously Ruchir is the most knowledgeable person in insurance that I know and they've just got an insurance broking license as well. So, you know, I thought maybe coming from the horse's mouth, you know, Ruchir, what is term insurance?

Ruchir Kanakia: Term insurance, simply put, is if you die your family gets paid or your dependent or your nominee gets paid. Simply put.

Deepak Shenoy: Perfect. So I think I mean, obviously, there's more to it. So how does it work from an insurance company perspective? Why do they do it? Well, what's their [motivation]? And then from, you know, the insured persons' perspective [how does it work].

Ruchir Kanakia: Let's take the insurance company's perspective first, and from an insurance company's perspective, right? It's your protection, which means pure insurance, right? They don't have to return any money and the premiums earned directly hits them as revenue on their financial statements. So from their perspective, though, the reason why they would want to do this is because it is one of the profitable products they have, right? Even if you discontinue your policy, they're not going to return any premium back to you. The only way they have to pay any amount to your dependent is that is the eventuality of death, [if it] happens in the stipulated contract period.

Deepak Shenoy: So then you have a term for which the current contract is negotiated - How does you know an insurance company even price this thing?

Ruchir Kanakia: So there are various factors to price this right? In evolved markets like the U.S., they can price it based on the location you live, based on whether you smoke or you don't smoke, based on any pre-existing medical conditions you have, based on the factors in the environment which affect you which you grow in. But in India, primarily they price it based on pre-existing conditions and whether you smoke or you don't smoke. And that is probably also the reason because we don't have enough data to price risk accurately. So this is fundamentally we are relying on mortality rate calculations, which God knows how outdated have they become or whether they have even gone ahead and factored in the possibility of a pandemic which we all did not do for the last more than 50 years Right. And that's where the crux is.

Deepak Shenoy: I think that's that's interesting because when you come into a pandemic situation, you're seeing that basically, if you've thought last year, that my possibility of a person dying or the possibility of a person dying was based on how long he's he's lived so far so if he is in his 50s, he is unlikely to die next year. But now if the pandemic comes in and changes all of that. So in this case, the company itself prices its risk based on some, you know, mortality tables, like you said, you know, certain factors, but they don't take all the risks, and the insurance companies also palm off some of the risks to somebody else.

Ruchir Kanakia: Right. That's why reinsurance companies come into play. A great majority of the term insurance, which is bought in India, right, has the risk is actually transferred to a re-insurance company. But these reinsurance that are like they may be thousands or tens of thousands of insurance companies, but unfortunately the number of reinsurance companies is maybe max in tens or hundreds across the world. Right now, the risk is concentrated with these guys, and these guys are crunching data to figure out and to predict how long all of us are going to live.</span

Deepak Shenoy: I see. So now they're taking the assumption off/away from insurance companies and becoming the reinsurer. So an example would be perhaps Berkshire Hathaway in the U.S..</span

Ruchir Kanakia: Yes, Berkshire Hathaway, Swiss Re, Munich Re. These are like renowned reinsurers and to a large extent, the current pandemic has been like an eye opener for them because now they will have to price in such events occurring more often than they have in the past. Right. And no one knows how this is going to change their entire pricing in this industry today. Right?

Deepak Shenoy: You wouldn't. You wouldn't have an idea before this and

Ruchir Kanakia: From an insured person's perspective, ready to come back to your question, if I were to say that you're buying term insurance to protect your downside in case you die. Right? And because you want your family taken care of and you want your debts to be taken care of, these are the only reasons you're thinking of buying a term insurance.

Deepak Shenoy: So Dependents and Debt so that is your two criteria for buying term insurance.

Deepak Shenoy: This is important and I think we'll come back to it more as we go along. But you know, the next part of it would be like, how much does one bite, you know, like, for instance, how much insurance [coverage] is needed for a person and how much can you get at one level? And for how long? So do you buy the term insurance to last for 100 years from now or..

Ruchir Kanakia: My way to answer this question would be do you buy term insurance until you expect that you're going to generate income or you're going to make money? Right. So that technically for a salaried employee will be retirement age. For a self-employed, it will be his ability or his willingness to work till [some] age. And if that is in most cases, that age is around 60-65 years. Because then it becomes really difficult to get up every day in the morning and go to work. So that would be the maximum age for which you would want to buy term insurance for. Typically, there is a misconception that people buy term insurance to claim that eventuality. I have to get a claim right. We Indians have this thing that we cannot see money going out and we not getting anything in return. Right. So that's where the majority of those people get it wrong because you're buying it so that that event never happens to you.

Deepak Shenoy: Precisely. No. In fact. I mean, how could you rather die than let the money go to waste? Yeah, it doesn't sound right, but you're right. I mean, the framework of thinking is somehow I should ensure that you know, this money does not go to waste.

Ruchir Kanakia: Money does not go waste because we are very value conscious as a country and if you see that we are trying to derive as much value of every, we are trying to get a bargain or we are trying to get money and we won't leave up an avenue where we will leave money on the table.

Deepak Shenoy: Yes, yes. And I mean, in fact, that causes us to lose more money because I think the 100 year policy will be significantly more expensive.

Ruchir Kanakia: Exactly right. Because the probability of you. The number of people who will live to 100 is very minimal, right? Especially in a country like India, right? So that means that the insurance company is definitely going to have to pay you that amount.

Deepak Shenoy: So it will price it accordingly. It will say if you are coming to me for me one lakh rupees of cover for that one lakh I will charge you. You know, I don't know, maybe 1,500 or 5,000 rupees a year because in 20 years, you know, I'll recover all that I need.

Ruchir Kanakia: So we've covered the ‘how long’ [part], the ‘how much’ part is the bigger question . And that typically depends on what sort of income you are generating and what you are doing to generate that sort, that income. Right. And there are two factors: how much we want to buy and how much someone [the insurance company] wants to give us and you know, the ‘someone who wants to give us’ is the insurance company. And this, as we discussed earlier, these  reinsurance companies are relied on. So then the insurance companies have some restrictions based on which they can take an exposure on you. So typically, the thumb rule is 10 to 25 x of your income is what you typically get which an insurance companies is OK to insure your life for. And if I were a self-employed person, this is basically three years' average ITR is taken to calculate that accurate average annual income - average of the last three years ITR. And for someone who is salaried it is just the last three months salary slip, that's it. So if you are in and if you are a salaried employee who is going to become non salaried, it is better that you buy the insurance before you quit your job. In my opinion. Right.

Deepak Shenoy: Because you won't have three years of an ITR, you might as well do it before.

Ruchir Kanakia: You will have three years of an ITR. But then you would typically have folks who are salaried. Insurance or the insurance companies are okay to take a higher multiple of risk in terms of the sum insured. Versus if you're self-employed because the business you are going to be affected by, the ups and downs of your income is going to be affected by the ups and downs of your business. So that is also factored in.

Deepak Shenoy: Ok, so I mean, we did a rough calculation using Plan (plan.capitalmindwealth.com) - also over how much the rough calculation was for every lakh rupees of expenses. Non debt expenses you would actually take, say, about 1.5 to 1.8 crores of insurance for someone who is 30 years old, assuming that you live until you are 90 and so on, we have, you know, a calculation on that. But this is an interesting aspect. But we hear you talk about ones about what about if you have a loan.

Ruchir Kanakia: So typically when you have a loan, the company who's going to loan the amount to you will insist that you buy a policy as a condition, a precondition to get this loan right? This was not a norm earlier, but now more and more in the last five to 10 years this has become a norm. Now, if you have an existing term policy, you can go ahead. And as long as the tenure of your loan is lower than the tenure of the policy which you hold together, you can assign the policy and thereby save the cost  of buying a new insurance because. Every year which passes, the life insurance cost is only increasing, it's never going to come down because of age on to inflation as well and other factors. So that is an option. Otherwise, the insurance or the loan provider NBFC would typically have worked with an insurance provider to create a plan for people who avail this loan. Here the loan provider will offer you this option.

Deepak Shenoy: Got it, so your loan provider who who basically says, listen, you'll have to take an insurance policy that you reassign one of them and this control an assignment is and gives you day the money goes to the insurance company, to the lending company and then whatever is left, they pay you back [to your beneficiaries].

Ruchir Kanakia: Balance, depending on because you've taken the policy for the entire loan amount right now, you would have paid about - you died in the fifth year or 10th year based on that, you would have paid off a certain percentage of your loan. Right. So the delta will be there. Yes. So that money will go back to you or will go back to your beneficiary.

Deepak Shenoy: And of course, if you've paid off the loan, you can shut down the term insurance, seeing that not part of. So I could have multiple plans on this for my family to be taken care of after I die. One is for my loan to be taken care of. And so it would be different policies, I can shut down one.

Ruchir Kanakia: So I would insist that if you have debt right, take out a separate policy just for that debt and keep it separate so that you know that this policy can. You can ensure that you stop paying for this policy the moment your debt is taken care of. Debt and Dependents, so we can technically say that people can now have two policies one for their dependents, one for Debt.

Deepak Shenoy: For now it makes sense. I mean, especially if you know as you go along. The other part of this would be can a person who does not have an income like say a Housewife buy [term insurance]?

Ruchir Kanakia: So typically they can - there are joint policies where a husband and wife can be insured, but they come based on certain terms, right? Like based on the husband's income is used as a proxy for wife's cover. Right. And typically, if the husband is getting a one crore cover, the wife would get a 50 lakh cover if she does not generate an income? Right. And that is the only way for you to now insure a dependent, who is not income generating. Because when you buy term insurance, you will have to do financial underwriting and you have to do health underwriting. Our financial underwriting cannot happen if you are not income generating. Hence the husband's income is used as a proxy.

Deepak Shenoy: This is, you know, this is interesting because if you come to a point where you're saying that is insurable interest in you, but your spouse who is not income generating does not have any insurable interest independently of you. That means you cannot buy insurance independently for your spouse, despite the fact that if he or she is not there, the other spouse has to take [on a] disproportionately larger cost in terms of children etc.

Ruchir Kanakia: Unfortunately, that is how the industry is like. One of the biggest gaps is - How would someone insure someone who does not generate income? And what are the costs of like life then that comes to and how do you price it right? And what sort of amount do you now insure someone's life?

Deepak Shenoy: They might as well said, Listen, no, no, no. We are going to go with actual income rather than perceived loss of income or whatever.

Ruchir Kanakia: It becomes very difficult to price it. And then what happens to the premium rate if someone is not income generating, how does he now pay a premium rate, where does he generate income to make this payment of the premium year on year?

Deepak Shenoy: Yeah, but then the payment terms, if you have a payment, can you have a payment of saying I'll pay every year vs I will pay only for the first five? Can I do something like this?

Ruchir Kanakia: Yes. All the insurance companies, right? Let's start from the lowest term, which is monthly, OK, monthly quarterly, six-monthly, yearly. Then they have something called as limited pay, in limited pay. It can be one shot payment, three years, five years, 10 years. According to me, the most optimal payment mode which you should opt for is yearly because if you do monthly, quarterly, six monthly, they are technically charging your premium for paying in those intervals.

Ruchir Kanakia: Interest. Yeah, the interest gets [adjusted], but yearly is the most optimal way to pay you [premium] because a lot of us lately, I've had folks who ask me, I don't know about the next 10 years, but I know I'm making this x y z amount of money. So why don't I just pay for the next in the next three to five years and the coverage can be 30 years? One important thing most of these folks miss out is that in 10 years, if you achieve your financial goals, you will. You don't need the term insurance right so you can stop being premium. But if you've prepared and it's already paid for it, there is no way to get like the policy there.

Deepak Shenoy: This is like the Club Mahindra of insurance. Yes, you pay, then you have to use it. Whether you like it or not, and you know, or whether you need it or not. It's very interesting. Also, what do you? There's one part that I think you mentioned, which was very interesting. While you take the policy and you decide the term upfront and you decide the amount upfront. There is no change afterwards. So for instance, you lose your job after you take the policy. That policy will still continue despite your not having an income up so that that part is clear. So in essence, anything that happens after the signing of the contract is not going to affect the contract itself.

Ruchir Kanakia: As long as you pay the premium.

Deepak Shenoy: Yeah, as long as you pay the premium. All right, which I agree with. Now what you once said is that there is a possibility of some part of a change. For instance, you are bachelor and you got married after a few years after and you've taken a term policy on yourself after you got married after five years, you had a child. Now you can at this point do something more right?

Ruchir Kanakia: Because some some policies allow you to increase your coverage because you have added a dependent rate in your family and they have time periods in which, based on every company, you have to notify the insurance company and your sum insured is increased. Now the increase sum insured is priced based on the age where you request for this increased sum insured and only the delta is price. So it's like, let's take an example, right? One crore is the based sum injured. And now you're increasing it by 50 Lacs, so only the premium of 50 additional premium of 50 Lacs is priced at the age you bought. The policy first policy at 30 and the dependent was born at 35, so at 35 for the balance additional 50 Lacs. Whatever is, the price will be added. And the good part about here is that you don't have to go through the health underwriting again rates so this additional premium can be bought by just doing a simple endorsement.

Deepak Shenoy: This is interesting because I don't have a medical test again, and I effectively get a new insurance policy for another 50 percent simply by just paying the extra premium on top of it. This health and health, I mean, help us understand this for an investment type of policy. They don't usually insist on health checks and all that, but for term they do. What do they do in these health checks? And is this relevant for you to declare everything upfront?

Ruchir Kanakia: Absolutely. It's super important for you to declare everything upfront. Don't misrepresent any fact, right? Because it helps the insurance company price risk if you were to think about it, right? If the risk is as accurately priced, the better it is because the fulfilment of the contract holds on us being honest to each other.

Deepak Shenoy: Got it, so you actually price. So you have to say, for instance, I have asthma, although they may not discover that you have asthma for a long time. It's better to declare it upfront.

Ruchir Kanakia: Perfect, and it's also better to insist on a full medical check up right at the time of term insurance, because that is always a choice which you have as when you're buying term insurance, like when you do a tele medical and maybe you forgot something you don't leave it to chance. Because you are thinking long term in your thinking about an eventuality which most of us don't want to happen. So you'd rather be sure right now because the problem is that if you can, if you misrepresent anything and not everyone wants to misrepresent knowingly, it can also happen unknowingly. Right. Because if you didn't know, how can you represent something which you did not know? So it's I will tell you, I insist that if given a choice, please go ahead and do a full medical check up and then buy a term insurance. That way, you are sure and the insurance company is sure.

Speaker3: In fact, I am, and I took my insurance. I was, you know, I was 42 and I went through one of these things and they told me, or do a, you know, treadmill test in TMT and ECG and I was like, why? But I said, I will do everything, but don't tell my family later because I won't be there, that this person was unhealthy from the beginning. So you'd better know how healthy, unhealthy he is, right? Right from the start or more interesting. So coming back to this, there is also obviously a point where I think you would say, you know, if I asked you if I need life insurance, you would look at me and say, No, you don't need it. So what are these [situations or circumstances where someone does not need insurance].

Ruchir Kanakia: You know, that's why I guess if you don't have Debt and you don't have Dependents, then I don't think so. You need life insurance.

Deepak Shenoy: So essentially, what you're also saying is that don't buy insurance for/on your children because children don't have any debt or dependents, don't buy insurance. When you've reached a point where your dying is not going to cause [financial distress] because you have enough savings to be able to take care of your family, really care of themselves. You don't have any loans, so essentially don't buy in these circumstances. And if you already have insurance, is it okay to shut it down at this point?

Ruchir Kanakia: Absolutely. That's what most of us don't do right at the end of it because we are so used to [paying it].The policy is there and no one reevaluates. After 15 years after buying the insurance, do I still need it or. And if I don't need it, why am I paying for it? Right? And that becomes a very difficult decision because you've set up an SI or a standing instruction or something and it is happening and you just wake up one fine day because of some trigger in your life and want to re-evaluate it. Or you think about this

Deepak Shenoy: And you have enough money. So it's not like, you know, there's a good point. But then, you know, let's come back to ok assuming you do need it and you've reached a point where you do need it. Now, you can go and buy this insurance through many mechanisms. I mean, one is I know we've got, you know, insurance agents or brokers is one there. Another one is the bank themselves, and so many others - can you talk us through it?

Ruchir Kanakia: So let's just talk through all the ways in which all the people who are involved in the insurance value chain  and who these people are and what role they play? Right? `So the first person I would like to talk about in this entire value chain is the agent right? And agent is nothing but a guy who is representing an insurance company and is trying to sell insurance to you. He's helping you answer the questions, which we answered just earlier in this podcast, right - like, how much cover do you need? What should be your payment frequency? He's going to help you make all of these decisions right, and 99 percent of us need that help. So getting an unbiased agent is always very difficult - to figure out who's biased vs who is unbiased,so opt for an unbiased agent. And most of this, you can figure it out by asking him some relevant questions. The agent also sort of becomes the support behind claims to your family, and if he's known and trusted, then that's that one person who you can call during their time or your family can call and he can help with the entire paperwork during claims. So that's one channel.

Ruchir Kanakia: Second channel is your bank. Your bank typically would have targets to cross-sell products, right, and your bank manager they get regularly transferred and your branch may change because you decided to move to another city. So I wouldn't say they are the best people to buy because they don't understand insurance. It's one of the many things they're selling, right? So they may or may not be able to give you an accurate understanding. And most of them, when they are pitching this product, you will call someone from the insurance company to sell it to you. Then there is also an option of e-term, which is when you buy directly from the website. So if you've done your research, you know everything there is to know and you have answers to all the questions which we are just discussing that you can go ahead and buy directly on the insurance company's website itself. The cost difference is in single digit percentage basis, and it's not going to be that much, but at the same time, the whole process of underwriting, scheduling the medical test and knowing where your policy is stuck and all of that you are completely relying on the insurance company.

Ruchir Kanakia: So that's where and once you get the policy right, even during claims, you will have to follow the process on their website. So while you may be tech savvy, you also need to factor in that you're buying this for your beneficiary or your dependent on your nominee who you're nominating as the beneficiary of this policy. Is that person going to be savvy enough to be able to manoeuver what all the things you are able to do? Or would you like some help? And that's where brokers come in. And typically brokers are an advocate of the customer, what they're supposed to be unbiased. So technically, if they do their job really well, well, right, they can be great... It comes at a cost. Nothing is free. Nothing is like a free lunch. So based on what sort of customer you are, which you know better than most people you can decide from where to buy. But a bank is not the right channel to buy or people who don't do this for long term or who are not long term insurance sellers or who have not been in the industry on the long term are not the right people, always the right people to buy it from.

Deepak Shenoy: This, you know, and technically, you should buy insurance from someone who's younger than you because you need to be. They need to be able to outlive you, to be able to provide your service for your next of kin service.

Deepak Shenoy: That it makes sense to buy it from a business rather than from an individual, because the individual may have issues. And then therefore, but quite interesting because you've got, you know, those as one where one of our loan providers, the home loan provider will tell you that I want you to buy insurance and most likely they'll sell you some insurance. But you said that there's problems with that as well?

Ruchir Kanakia: Yup. So home loan providers, right? The interesting thing most of these guys will not tell you is that they make money off their insurance, which they also sell along with the loan, right? And that comes back to them as commissions. Right. And most of us buy home loans. So anyways, with the loan, there's collateral on it. Like which is a physical house, right? So technically, they can recover that money and they have their own terms to recover that money. And this entire amount, right, which they will ask you to take this insurance policy, almost 40 to 50 percent goes back to them. So they mean if you have an existing policy, it's better to assign it provided you meet the criteria. If no, then you can also insist to a loan provider that boss I will get my own policy rate because there's a law that you know they can mandate you have an insurance, but they can't mandate that you buy from them so you can do your own due diligence figure out what is the best way to do this and then accordingly, either assign you existing policy or buy a new policy for the specific purpose of this particular loan and assign it to the [loan].

Deepak Shenoy: So you don't have to buy it from the home loan provider. You can buy it out yourself and say [use this].

Ruchir Kanakia: Have to buy it from an. Loan provider, for that matter, is a home car or what? Whatever different sort of loans you may have

Deepak Shenoy: Taken, I see this is because I think a lot of people have that as a as an issue. And then when you finish the loan, they're supposed to unassign that policy so that you can continue with it.

Ruchir Kanakia: It's like a very simple no objection certificate read or a letter saying that the loan is closed and you've gone ahead and collected the original documents of your flat or underlying asset and the fact that the policy should be released and you should be able to go ahead and make that your beneficiary, the nominee here.

Deepak Shenoy: Ok, so now coming to the next step of this process will be we were insured against #1 - ourselves dying. But can you insure against other things? The riders, what are the different riders available in term insurance.

Ruchir Kanakia: Yes, there are plenty of riders, right? Because the insurance company always likes more premium, so they will try to create new riders, and they will try to push via their sales agents or via their different channels? I guess a pure term plan should be bought as a pure term plan. Two things right when you are a rider, one thing is that you cannot delete it. Because it's attached to the contract for the tenure which you've taken. So delete or letting go of the rider becomes a problem. Or when you let go of your main policy, then also it's a problem because you may want to keep the rider, but you may not want the policy. Like we discussed that if you're if you met your financial goals in life and have like, budgeted for it. And in that case, then you are now stuck when you are in a conundrum, what to do? So if you keep it separate, at least you have a choice on what to continue, what not to continue. So typical riders are a personal accident policy, which can otherwise be bought separately. Then there is another rider called Critical Illness, which covers a fixed set of diseases, right? Then here I would like to mention you need to read the fine print because what sort of diseases they cover and of what severity great. And most people think that it covers it. And then they get a shock that, OK, well, any of this particular severity, this disease is covered.

Deepak Shenoy: So you're saying that all I get, for instance, if I cover, I don't know cancer, but they'll cover one form of cancer, but not the other!

Ruchir Kanakia: Or they will say specified severity. And then you have to figure out how they've defined specified severity in their fine print - ki what sort of cancer of what specified severity is this policy going to pay me right? And also then there is the concept of return of premium thinking because Indians love to get the money back. But imagine this right. You paid five lakhs for a one crore plan for 30 years or 40 years, and that five lakh is coming back to you after 40 years. But you've paid almost like more premium to the insurance company just to get that right. Yeah. Financially, it does not make sense, I guess. Deepak, you've done this calculation,

Deepak Shenoy: In fact, I personally bought one of these because I had that same thing of you give me my money back. I didn't even know if Term at the time, but this was the cheapest one. It was 800 rupees per lakh and I later found all different take in the regular term plan from LIC it was 250 rupees, but like I was 22 or 23 years old at the time, so 250 vs 800 rupees per lakh is like, I'm paying nearly 4x nearly a 3x plus the premiums in order to just get my money back.

Ruchir Kanakia: Yeah, but then, yeah, I get your point, right? Like, but that is what an insurance company will want to push right - a rider because it's getting more money out of the customer. So my honest advice is just buy a pure term plan. And also, if I covered it correctly, right? If you had an informed customer, then no matter what happens, then you go ahead and apply directly to the insurance company. They would still try to call you and try to upsell stuff, right? Right? Yeah. The problem there is that people who are upselling stuff or they are getting paid based on the ticket size of the client, which is you. And the more they upsell to you, whether it's relevant, irrelevant, the more their incentives are aligned towards that, right? So very few people, even in an insurance company, they have targeted to meet, if you get that in case of any sales org right, you have targets to meet and then you go ahead and meet those targets and you're put under pressure, right? So even someone who's genuine now is put under pressure.

Deepak Shenoy: This I think you're right in the sense that eventually they will sell you some of this stuff and do perhaps like you said, perhaps the rider available separately elsewhere. The one difference is you'll probably have only one medical to go through here as really two different policy will require two different medical check ups.

Ruchir Kanakia: Actually, most of these riders don't require medical - A PA policy typically, they're not required of medical CI policy. Also, in most cases, maybe not required medical - so 90 percent of the time. So they will get some of these policies without any medical or other thing.

Deepak Shenoy: So from just to clarify, not critical illness is probably the one thing in a term plan as a rider that pays you when you are alive other than ROP (return of premium)? Yep, so critical illness - The idea is if you get cancer they pay you a certain sum of money and that money's supposed to care for her medical treatment while you're alive and after that, if you die, the term plans, sum assured, will go to a next of kin.

Ruchir Kanakia: You're absolutely right. I forgot to mention one more Rider called terminal illness, right? Like if terminal illness is what you're if you buy that rider, the premium is incremental. Some companies even offer it as free. I see, which means the moment they know that you've been diagnosed with terminal illness and you're going to die in six to nine months, the money gets transferred sooner than later.

Deepak Shenoy: Oh, the whole sum assured. So much so that you can still get it in your life if you...

Ruchir Kanakia: Out, but then you have to be terminally ill, which means that you are [not around much longer]

Deepak Shenoy: Just, yeah. Of course

Ruchir Kanakia: None. Yeah, that money is available, but it comes at a very fraction of the cost or some companies even bundle it for free - they price it into their product itself.

Deepak Shenoy: Effectively, it's like saying, OK, it's not like Alzheimer's, because Alzheimer's is not terminal. I don't know if it is, but they might define what terminal is. It could be a certain form of...

Ruchir Kanakia: Cancer

Deepak Shenoy: Or a certain kind of thing where you say, OK, listen, the doctors told you you have x months to live. And when the doctor says it in such a fashion, you need to be OK, So then you get a certain sum of money straight to your bank account. If you live longer, you still get to keep the money and you know, you don't.

Ruchir Kanakia: But so most of these cases are whether the rider is built for cases where the death is eventually and the span in which it eventually is also very well, very prescribed for them. It's well defined, yes, less than a year.

Deepak Shenoy: I mean, we know that now, of course, with technological development. So this is one of those things which could be, you know, this is just me being Indian about getting your money back and you also recover and you become fine again. And although, I mean, this is just such an off chance that it's not, yeah, yeah.

Ruchir Kanakia: The probability is like [very very low]

Deepak Shenoy: Plus for us. I don't want a terminal illness under any circumstances I don't. I'm not going to be terminally ill and recover just to get the money from you. The point is now let's see. I have term insurance, I've gone, I die. What does my next of kin have to do? I'm assuming that, you know, we're in the process of saying there has been knowledge about the process. So what is this and what happens in these processes?

Ruchir Kanakia: Let's split it into two categories saying that that has happened due to natural causes. Then there are a list of steps you need to follow. If that has happened due to unnatural causes, then at least a step which you need to follow in. Unnatural is an additional burden of an FIR, and some record that you have gone ahead and complained and you have a physical copy, which is to make

Deepak Shenoy: A car accident or a murder or a crime or a suicide.

Ruchir Kanakia: Exactly right. You need to...That is in addition to everything you need to do in case of a natural death scenario. In a natural death scenario, the process is very straightforward: you need the death certificate, the KYC, the reason of death, if the person was hospitalized before then, all the hospital reports pertaining to it. And this is very straightforward.

Deepak Shenoy: So a discharge summary of...

Ruchir Kanakia: Discharge summary of sorts. So every insurance company on their website typically mentions all of this in very detailed [way]. But the question is what to attest, what not to attest, what forms to fill, how to fill it out and because you are hassled, typically you often need help or you need assistance during that time that it's not that you're not skilled enough. It's just that, you know, in my mind and you'd rather have someone help you manoeuver through all of these things, right?

Deepak Shenoy: Yes. And is there a time limit after that that you have to claim? Or is it like

Ruchir Kanakia: At least the intimation needs to happen immediately right and that's as soon as possible. If someone's died, someone needs to intimate the insurance company that the death has happened, then the claim, then they give you time to file. So one is an intimation, and then the claim is filed once you've gone ahead and submitted the first set of documents.

Deepak Shenoy: So let's say somebody dies and they haven't even told their next of kin that they have this life insurance and it's been discovered six months later. Is that a problem? And generally.

Ruchir Kanakia: It happens a lot of times, and because if you have died in that way, you will have to look at your insurance providers' terms and conditions. The safest answer to this is that because typically they mention the outer limit in which they need to be notified, right? Right now, what happens like if someone had insurance and died and died and the policy was active and five years down the line someone realizes that the policy was active and tries to claim what happened in that situation because that is defined and it's very, well defined in most of their contracts.

Deepak Shenoy: Perfect so then one needs to actually it may not be in the contract that you have, but it could be on the website of the insurer saying this is..

Ruchir Kanakia: During the claim process, right? Like. But in your case, it still does not apply because if your beneficiary did not know the person has insurance, he would not know which company the insurance is from because that discovery would happen much later. Right. But there is always a specified time in which you need to inform the insurance company.

Deepak Shenoy: And the insurer. So is there a place where a person who has died, the next of kin can look up and say, OK, this person with this PAN number. Is there a record of I know that they are talking about demat dematerialising..

Ruchir Kanakia: No, actually, that exists even today. But it's not widely being used - EIA accounts are an effort by CDSL and NSDL have these insurance accounts where you can figure out if you logged your policy. So that's one way to figure out that is if you link those accounts with the policy. So at the time of applying the policy, they ask you for that particular account number or they created it for you if you need it to be created. But now, if you've not opted for it or if you've not created for it, then it's very difficult. And secondly, this means that you will have to go and approach a CDSL or an NSDL with the PAN card, figure out what policies are linked to this PAN card or to even check some of these things. My best advice would be when you buy a policy and when you have a beneficiary you, it is your duty to inform the beneficiary, at least about the policy and sort of like have let inform that person, which most of us a lot of times forget to do right. And also, if, you know, change the beneficiary. Later, you change your nominee suddenly midway through the policy, at least tell all the nominees, and will keep them informed. Another simple way would be to just keep all your financials in one email account or in some folder on your computer and keep a track record and inform or inform your chartered accountant of all of these things, right? Because that person can also assist straight. He know he's claiming tax deductions for you so he can be a proxy for you to now go ahead and inform your Family/

Deepak Shenoy: This actually brings us to the point we discussed earlier. If you pay a single payment for an insurance company, the likelihood of your next of kin discovering that policy becomes lesser. Because if you haven't done all the record keeping, whereas if you're paying regularly, then at least there is a record every year.

Ruchir Kanakia: The natural thing is, the person is going to look at the bank statement right and in the bank statement is looked at and you see that the money is going to some insurance company, then it's a very easy way to track that there is a policy link. You may not know the nature of the policy, but then, you know, at least know that the policy exists

Deepak Shenoy: That’s a good point. And you know, there are certain reasons why an insurance company can reject the policy and can you help us through that.

Ruchir Kanakia: So I guess now that the new laws come into play right, like after three years, it is impossible for an entire life insurance company to deny a death claim. Right. But I guess the major reason is misrepresenting yourself to the insurance company in the first three years. That can be the cause of misrepresenting financial facts, which means by not accurately disclosing your income or proof sufficient to that income which is declared. Secondly, is any underlying health condition which you have not declared. Now the gray area is that if you didn't know you had a condition, what you would not technically declare it within these three years, right? And it goes back to my previous suggestion, I had to take a medical test when you're taking life insurance, no matter what.

Deepak Shenoy: So it makes sense to actually declare your full conditions, as that applies only for the first three years after three years. An insurance company can't deny you, and if they knew or if they discovered later that you had a heart problem, you didn't disclose it after three years, they cannot deny you.

Ruchir Kanakia: Oh, yes, that is what the current law has changed.

Deepak Shenoy: So. So (a) - declare because you don't know when you are going to die. That's the idea of taking term life insurance. And the second part is that the insurance companies can reject. For this reason, they could probably be rejected for other reasons as well. And what is your redressal then what? What happens after this?

Ruchir Kanakia: Typically, you have an IRDA ombudsman who you can approach immediately or a grievance cell at IRDA. And then I guess most of us will have to go through the Consumer Court and Consumer Forum, right when you go to District Consumer Court and State and then National, and eventually you can approach the Supreme Court after all of this.

Deepak Shenoy: Yes, I mean, at one point I think we did an article in Capitalmind about how somebody had gone all the way to the Supreme Court for this. But it's interesting because I mean, there are various stages where courts can grant you, you know, relief. Yeah. And typically, as much as I have seen in most cases where at least there's no obvious fraud there. If there is obvious fraud, the court will side on the case of the insurer, but if there's no obvious fraud, they tend to side on the case of the individual. But here's where you know one part of this entire process comes in and says now, well, what's the maximum amount of insurance that is possible? I mean, if your insurance, you said, is limited to, say, X percent of your income or X multiple multiple of you and your income changes, it goes up or you lose your job, can you apply? You can do anything with respect to that

Ruchir Kanakia: To increase your insurance. Yes, technically, as we discussed this earlier, like it depends on your financial underwriting. If your income reduces suddenly during that contract, what sum insured they have granted to you that they cannot take it away from you. So any material change in income after the policy is issued is immaterial to some extent to the insurance company

Deepak Shenoy: I see. So in a way that they can't increase your insurance, either. You just take another policy,

Ruchir Kanakia: You get another policy to take more insurance if you want to.

Deepak Shenoy: And should you take these from the same companies or from different companies?

Ruchir Kanakia: Ok, that's an interesting question. We all like to diversify your risk especially if you are buying a large policy, and then you may want to split it across two or three companies, but that also comes with an additional inconvenience of having to go through medical underwriting and medical test again. Like, if you do that and some of these companies now do tele medical if you fall into certain criteria and under certain age group and everything, but then that that sort of then puts you in that gray area for three years that if you didn't know you had something and then you were diagnosed and it can be a cause to reject your claim because it's misrepresentation, right? It's not that you knowingly did it, so it's best to then subject yourself to a medical test day. And then at least you are sure of some of these things. Because if an underlying condition gets discovered, your premium can be readjusted or the insurance company can tell you that this this is the cause why we are readjusting your premium or increasing your premium, and you have an option to either take it or ask for a full refund,

Deepak Shenoy: So you can actually say, Listen, I, you said you'll pay me, you'll do charge me, you say Rs 10,000 of premium and they come back and you don't know 15,000 because you have this medical and you can tell, No, no, I don't want your insurance. Refund me my 10,000.

Ruchir Kanakia: If I guess in most cases, they will refund the amount minus the medical test charges, which are normal. Some, but at least you, they give you that option, right? And you, have a choice now to make.

Deepak Shenoy: Yes. And nowadays they actually give you the medical reports as well.

Ruchir Kanakia: Yes, definitely. All of them share their medical report immediately. They have to disclose it to you in your medical report at the end of the day.

Deepak Shenoy: Good point, OK? So I think as much as we've covered this and I think this is a part of that, a lot of people will be individually buying policies. Let's end with this and maybe interesting concept that you told me that I had no idea before I met you today about how the scenario is right now with a certain kind of policy called a group term life insurance where people, you know, often tell us, Oh, my company has a term insurance on me, so I don't need my term insurance, but we'll come back to that. But what is this group term insurance?

Ruchir Kanakia: Group term life is an insurance which is typically a company will buy for its employee as an employee benefit. Right. And what that does is that the company, it's an annual contract. First of all, unlike your individual policies, which way you decide to choose to get to choose the term or the age deal, which you want to be in charge

Deepak Shenoy: So you renew it every

Ruchir Kanakia: Year. It has to be renewed every year now. Now, the premiums on group term life are typically very aggressively priced compared to your traditional products, but their downside is like imagine in a pandemic like we are in right now, right? And if you don't know whether there's going to be a third wave or there's not going to be a third wave, right? A lot of people have not got the renewal for their existing group if there has been a single death in a company, which is which is likely to happen here's where while the company gives you this as a benefit, the company's a policyholder and the insurance company has a contract with the company and not you individually. Right, right. So they can decide on whether they want to renew this annual contract at the time of expiry. Or they may quote an amount which could bump up depending on the risk. Could they have what exposure they have based on how they price your entire business or the salaries which are being paid Because the same sort of underwriting happens for group term life also, and you need salaries for financial underwriting and then you're typically giving a multiple of the salary, 1x CTC to 5X CTC to do the employee who is the beneficiary. And there's also a concept of free cover limit, where in most cases the free limit is that the person will not be subjected to a medical test in case the free cover limit. If the sum insured is below the free cover limit, I see now what this pandemic has done is throw the entire industry into a spanner. Oh wow. Because no one expected so many people to die right, a lot of life insurance companies would have heard that Kotak Life has gone ahead and declared a quarterly loss. I know they have gone ahead and given a bleak outlook, at least for this year, because they don't know whether the third wave is going to happen or it is not going to happen. And a lot of these life insurance companies are sitting on a massive amount of claims which they have to pay out this year.

Deepak Shenoy: Yeah, I saw the numbers

Ruchir Kanakia: How do we price risk now in such a scenario, right? And there's also a cap where the regulator is not going to try to protect the consumer in terms of how much you can charge on the higher side of things and where does this industry go from here? I don't have an answer to this today. I guess only time will tell because the actuaries will have to go back and see how they price risk [now]. How do you see, are we going to see a world where there are going to be more pandemics? If so, at what intervals? And if so, what is the mortality rate going to be in some of these pandemics, right and the left that will have to be priced in, which means term insurance is going to be more expensive. It has already become and it will become even more expensive. Right. And also another part that we all should realize, right? Your personal insurance will be very handy in all of these cases while you are depending on your company for this insurance. But if no one's willing to sell it to your company because it's an annual contract, you are left exposed to it with the risk

Deepak Shenoy: That you should technically have your own.

Ruchir Kanakia: And yes, I always insisted that you are the owner of the contract on one side, not the company. B - you define their terms right and you are taking that cover for yourself, but is when a company buys it. Now they may go through a good time and a bad time, and they may want to revise the cover also. That also leaves you exposed.

Deepak Shenoy: Yes. Right. So it may not even be a pandemic. It can just be that the company's not doing well.

Ruchir Kanakia: Exactly right. And they don't have the budget for it all. But a lot of us are optimistic and believe that we worked for companies which have existed for 20, 30 years, 40 years, right? And nothing's going to change overnight. But in this new age anything can happen, I believe.

Deepak Shenoy: Yes, I bet. Having said that on the pandemic front, is it possible that they come up with term insurance policies when they say, Listen, if you die in a pandemic, we're not going to pay?

Ruchir Kanakia: Anything is possible. Deepak, right, because at the end of the day, a legal contract, right, and especially in group term life, you have a lot of the re-insurers going ahead and setting terms, and these reinsurers are looking at global losses. They're not looking at only India and deciding on all of these things. They've done a lot of these guys are scared also to some extent, right, because if there is no way to price this, how do they price something like this? How does the model change right when it comes to mortality rates, when it comes to a lot of other factors, underlying factors and in India, as we likely discussed earlier, right? We don't even base our premium based on the location by someone who's living in Delhi and breathing the air where pollution is through the roof. That, of course, vs someone who's living in Chikmaglur, where he's living in the middle of a coffee plantation breathing really good air (we hope). But both of them end up being the same premium

Deepak Shenoy: Simply because the underwriting standards haven't evolved to the extent.

Ruchir Kanakia: I don't think - We don't even have data right now, like at the end of the day, the statistical models which require huge amounts of data.

Deepak Shenoy: I mean, you're right. I mean, how do I know if, for instance, height doesn't affect if somebody is all over six feet, five ounces of X or higher or lower, or whatever.

Ruchir Kanakia: Height and medical history or medical records are able to write like we've now just started, like maintaining them in the format where someone else can read it or consume them.

Deepak Shenoy: This has been, you know, a phenomenal discussion. I think, Ruchir, I have come to the end of my questions. So anything you'd like to leave our listeners with.

Ruchir Kanakia: I guess we came up with like, very impromptu D^2 (dependents or debt) - we can end on that note that buy term insurance in case of debt or in case you have dependents. Right? Because those are the two main factors which you need to factor in, I guess. Thank you for having me on this podcast, I guess. This was a long overdue because we've had so many questions, which I think we've addressed using this podcast, which will help a lot of people and I'd like to at least give them a starting point.

Deepak Shenoy: I think this is, you know, it's phenomenal because so much of our communication at Capitalmind is also about, you know, Buy term, because this concept of investing in insurance is not good enough. But then there's so many complications in terms of insurance for me, I may be knowledgeable. My wife may not be so comfortable with the financial world, so I should actually be using an agent. It's something I discovered in the course of this podcast because I wouldn't be there if I might know exactly.

Ruchir Kanakia: And it helped right? We’re thinking like, there's a cost of convenience, right? We need to pay right at the end of the day. And like, I would be happy being that cost if it's to the right person. Exactly. And figuring out the right person can be very easily done by just doing a reference check, by knowing someone who was bought from them or by just reading about them and what they think and how they approach a problem or write about it.

Deepak Shenoy: Absolutely. In fact, I think for that, for that, I mean, I would say visit OneAssure.in. They have, you know, a vast range of financial insurance products that they have got and I have personally used it. So I'm very biased. You have to assume that I'm, you know, I'm on Ruchir's side here, where do definitely we should visit OneAssure.in And as we come to the end of this broadcast, I'd like to also say, please visit Capitalmind - we have a bunch of articles on insurance and other things - especially on Capitalmind Premium as well, where we have articles for premium subscribers and a great Slack Community to discuss all things finance. There's a discount code. And for those of you who have made it through this, much of the podcast (Hidden, LISTEN TO IT) use that for a discount at Capitalmind Premium. We'd love to hear more and thanks again for coming in on our show.

Ruchir Kanakia: Thank you so much, Deepak.

Deepak Shenoy: Great. Thanks, everyone for listening in.


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