Are convertible term plans viable savings options?

At the beginning of your career, when you might not be earning big money, a term plan is the most affordable insurance option. Later when your requirements change, you may want an insurance plan with a savings component which is absent in a term plan. For this you will have to buy new policies to build a corpus. However, buying insurance at a later stage in life will be costlier.

Purchasing an insurance policy early in your life means you will have to pay less for the cover as the mortality charges, a charge levied for insurance protection provided for death, are directly proportional to your age.

What is better? MF+Term Plan Or Ulip

For instance, Jeevan Anand endowment plan from Life Insurance Corporation (LIC) with sum assured of Rs 10 lakh for tenure of 20 years will cost Rs 52,577 a year for a 25-year-old. The same policy would cost Rs 56,408 per year for a 35-year-old.

What if you could get an insurance policy with a savings option at lower mortality charges even at a later stage of life? Convertible plans provide you just that. You can upgrade a convertible term policy to an endowment policy (which have a savings component) anytime during the policy tenure without any additional charges.

"Convertible plans are designed to meet the needs of those who are unable to pay the larger premium required for an endowment assurance policy at present, but expect to be able to pay for such a policy in the near future," says V. Viswanand, director and head of products and persistency, Max New York Life Insurance.

"The flat premium structure of a convertible plan aids larger contributions to your savings." Akshay Mehrotra Chief Marketing Officer, Policybazaar.com

The Convertible Term Assurance Policy from LIC and Five-Year Renewable and Convertible Term Rider from Max New York Life Insurance offered with their term plans are two options available for you. The minimum entry age for both the plans is 20 years. While LIC allows you a minimum cover of Rs 50,000, you have to buy a minimum cover of Rs 2,50,000 from Max New York Life for being eligible for the convertible rider. Compared to the price of standard term plans, you will have to pay a little extra for convertible plans.

The procedure of conversion is quite simple. A written request to the insurer is generally enough. Once converted into an endowment plan, it assumes all benefits and features of the product it has been converted into. You are eligible for an endowment insurance plan with a maximum cover of your original term plan for the remaining tenure of the policy without undergoing any medical examination. That is, if you bought the term plan for a 30 year period and converted it into a whole-life plan after 5 years, the tenure of this new policy can't be more than 25 years.

"As mortality charges increase with age, the flat premium structure of the term plan with a convertible feature helps in contributing larger amounts to your savings. So, a convertible plan can turn out to be a cheaper proposition compared to buying a fresh endowment policy," says Akshay Mehrotra, chief marketing officer, Policybazaar.com.

Word of Warning
Buy a convertible plan only if you are sure that you will exercise the conversion option at a later stage. "In case, you don't convert your policy into an endowment plan later, you end up paying more than a regular term cover without any additional benefits," says Rishi Mehra, co-founder, Bimadeals.com.

BEFORE BUYING A CONVERTIBLE PLAN Make sure there isn't any drastic difference in feature of a regular endowment plan and that of the converted insurance policy. Also, there shouldn't be any hidden charges attached with the conversion option. Check what proportion of your money will be allocated towards savings after conversion.   What's good? Conversion to a permanent insurance plan at no extra cost Flat mortality charges throughout the policy tenure and even after conversion ...and what's bad Costlier than regular term plans and will turn out to be even more expensive in case you later decide not to convert. No dividend payouts

As you are free to convert your plan into a regular endowment plan anytime during the policy tenure, the insurers do not guarantee any bonus payouts on these plans.

Low Long-term Returns
Looking at the current low returns from endowment policies, is it worth buying a convertible plan which costs more than a term plan?

Keeping in mind the long-term nature of this insurance-cum-investment tool and the future macro-market perspective, this product might disappoint you in case you are looking for high returns.

"As experience shows, the returns from LIC's endowment plans (taken as a benchmark since they have been there for the longest period) of the last 8-10 years, are in the range of 3-5%, which is quite low," says Kartik Jhaveri, founder and director, Transcend Consulting, a private financial planning and wealth management firm.

"No doubt, your money is getting you insurance but the extra amount which is getting invested is not fetching you adequate return. A fixed deposit account today gives you almost double than that (9-10% per annum)."

Limited Availability
Only two out of 24 life insurers registered with Irda offer convertibility. Future Generali had an option of conversion under one of its term plans, which they later withdrew.

"Such options used to be attractive one or two decades ago. Nowadays, hardly anyone exercises such an option," says Gorakhnath Agarwal, chief actuary, Future Generali India Life Insurance. "The mortality experience is improving. As a result, term plans are becoming cheaper. Policyholders even replace their existing term policies with cheaper ones."

However, switching will only be fruitful if age is on your side. With rising age the premium also goes up,which in turn can nullify or reduce the savings on your premium. So, one needs to take a calculate decision here.