From the time of its launch, the humble term insurance product has taken many avatars and has been clubbed with multiple uses to cover various risks due to the unfortunate death of an income earner.
Life Insurance Corporation (LIC) recently rolled out four term insurance policies (two each for the online and offline modes).
Of particular interest is the insurance product that seeks to cover loans taken by a policyholder. We review the LIC Digi Credit Life, non-participating, non-linked, pure risk life cover. The ‘Digi’ part in the product name is to indicate that the cover will be available only in the online mode and can be purchased directly as there would be no intermediaries.
Covering loans
LIC Digit Credit Life seeks to cover a policyholder’s loan in case of his or her unfortunate death during the period of repayment. But this loan cover is a slightly different variant with unique features.
The sum assured gets reduced each year upon repayment of the loan.
You can choose a sum assured ranging from ₹50 lakh to a maximum of ₹5 crore. The minimum age of entry is 18 years, while the maximum is 45 years.
There are single premium and limited premium paying options for continuing the policy.
Depending on the policy term, the limited payment period – the timeframe for which you must keep paying premiums – ranges from five years to 15 years. The loan tenor can extend up to 30 years. There are annual and semi-annual payment modes available.
Depending on the loan tenor and interest rate, your sum assured would vary based on the amortisation schedule of the loan.
The available interest rates for taking the policy are 6 per cent, 7 per cent, 8 per cent, 9 per cent,10 per cent, 11 per cent and 12 per cent, irrespective how much you may be paying your lender.
In case of a fractional rate, say, 8.5 per cent, you can opt for 8 per cent or 9 per cent interest option.
How the product works
Let’s say you opt for a home loan of ₹75 lakh and wish to take the LIC Digi Credit Life policy of an equivalent sum assured.
Assume the loan tenor is 20 years and the interest rate applicable is 9 per cent (assumed to be constant throughout the loan period). You need to pay premiums only for a period of 10 years in this case.
At the start of the first year, your sum assured would be ₹75 lakh. When you start repaying the loan and the amortisation schedule (split of principal and interest within your home loan till full repayment) is drawn, the sum assured on death keeps reducing.
So, at the end of the first year, as you pay your EMIs, the sum assured comes down to around ₹73.6 lakh, going by the above assumptions.
At the end of year 10, your sum assured on death reduces further to ₹56.4 lakh. Finally, at the start of the year 20, your risk cover would come down to ₹7.7 lakh and to zero at the end of that year, when the policy gets terminated.
Should you take the policy?
LIC Digi Credit Life policy charges a very reasonable premium for the loan cover provided. For example, for a starting cover of ₹75 lakh loan for 20 years, with 9 per cent interest, costs ₹13,650 (16,107 including GST) for a 40-year-old non-smoking male. Urinary cotinine test is compulsory for availing non-smoker rates. A 40-year-old can avail up to 20 times the average of the last three years’ annual income.
A regular term policy must be taken early on in your career, especially if you have dependent parents or siblings, and most certainly after marriage. This cover can continue separately.
For those setting out to buy a house in their late 30s or early 40s with loans, this term policy may be suitable as a separate product dedicated to loans.
With a limited-period premium payment option that is much lower than the full loan tenor, reasonable premiums and the linkage to the interest rate at which the loan is serviced, the LIC Digi Credit Life is a desirable term policy to cover risks.
Keep loan burden manageable at all stages and link only large-ticket liabilities such as home loans to the term cover.