Should homemakers buy a term plan? Here’s why their unpaid work has real financial value
The contributions of homemakers to household management have substantial economic significance that is now being acknowledged by life insurance policies. By considering family finances and the income of a spouse, insurers are able to offer tailore...
Picture an ordinary Tuesday morning in a household where the wife has just passed away. The children still need to go to school. Someone has to sit with the ageing parent who needs help with medicines and meals. The house still needs running. None of this pauses for grief.
For years, these jobs were simply hers, done quietly, without a salary attached, so nobody totted up their worth. Now each one needs a name and a price tag: a cook, a nanny or day care, a part-time attendant for the elderly parent. What was once absorbed into one person’s day, unpaid and unnoticed, becomes the monthly outgo the family must find money for when its finances are already strained.
Traditional insurance wisdom has long dictated that a person without an income does not need a life cover. This is because life insurance is meant to replace the income of the insured in case of their demise so that the fam ily’s financial needs are taken care of. Yet, life insurers make an exception for non-earning homemakers.
“One of the biggest misconceptions is that life insurance is only meant for those who earn an income. A homemaker may not receive a salary, but she has a critical role in the financial and emotional functioning of the household,” says Vaibhav Kumar, Head, Product Management and Ecommerce Channel, Axis Max Life Insurance.
“Responsibilities such as childcare, household management, and elder care have significant economic value and would incur substantial costs if these tasks had to be outsourced,” explains Niraj Shah, Executive Director & CFO, HDFC Life. Life insurance provides financial protection by helping the family manage the cost of replacing these responsibilities.
The Supreme Court agrees with the concept of replacement income. While ruling in an accident compensation case in June this year, it fixed a minimum notional income of Rs.30,000 a month for ‘loss of domestic care’ in case of a homemaker’s death. The figure may be new, but the concept is old as the cost of income replacement is one of the parameters life insurers use to determine the size of life cover for homemakers.
However, a simple stacking of replacement costs of a homemaker’s services does not translate into the sum assured. It is determined by a combination of various other factors.
How much does a homemaker cover cost?
Here’s how much some insurers charge as an annual premium for a Rs.50 lakh cover for a 30-year-old homemaker, till 60 years of age.
ADVERTISEMENT
What’s the right cover size?
In the absence of income or salary proof, insurers rely on factors such as the family’s overall financial condition, the homemaker’s profile and economic value, and underwriting requirements to determine the suitable cover for her. “The earning spouse’s income, his existing life insurance, financial commitments, dependants, as well as the homemaker’s age, education, health, assets, potential earning capacity and other underwriting parameters are considered for an appropriate sum assured,” says Rishi Mathur, Chief Marketing Officer and Chief Distribution Officer, Alternate Channels, Canara HSBC Life Insurance.
“It should not simply be a round number chosen because it is available online. It should be worked backwards from the likely cost of replacing household and caregiving responsibilities, outstanding liabilities and financial goals,” says Abhishek Bansal, CEO, InsuranceDekho.
ADVERTISEMENT
Though the family may calculate the cost of replacing a homemaker’s services (see table), and propose it as the value of sum assured to the insurer, the latter will also take into consideration other factors, the most significant being the spouse’s cover or income.
Most insurers cap a homemaker’s cover at a proportion of the earning spouse’s income or sum assured, typically 50-100% of the spouse’s sum assured. For instance, if the husband has a term plan of Rs.1 crore, the homemaker spouse may be eligible for a coverage of Rs.50 lakh to Rs.1 crore. “With eligibility norms becoming more accessible in recent years, homemakers can now secure a term cover of up to Rs.1 crore,” says Rajesh Krishnan, Chief Operations & Customer Experience Officer, Bajaj Life Insurance.
While Rs.1 crore is a common ceiling for homemaker term insurance among insurers, it is not a regulatory or industry-wide cap. Some, like Axis Max Life, offer higher cover. “Eligible homemakers can get up to Rs.1.5 crore cover, subject to criteria such as household income of at least Rs.10 lakh, a graduate-level educational qualification, and the husband’s existing insurance cover,” says Kumar.
While underwriting, the insurance companies can consider the following factors:
Spouse’s income: In the absence of the homemaker’s income, insurers rely on the spouse’s income to understand the family’s finances and compare it with the proposed cover.
Spouse’s existing insurance: It’s used to assess the family’s insurance profile and need for cover for the homemaker.
Value of her unpaid work: The family proposes the homemaker’s cover size by calculating the replacement cost of the jobs she performs in the house, such as childcare, eldercare, cooking, cleaning, transportation, children’s education support, household management, etc.
Family’s finances: The family’s loans and liabilities, assets, lifestyle, dependants and household expenses help determine the cover size appropriate for the family.
Homemaker’s age, health: As with other insurance underwriting parameters, the homemaker’s age, medical condition, family medical history, lifestyle, policy term, etc. are considered.
How much does it cost?
The term plan premium is no different for homemakers than for earning wives. “Term insurance premiums are driven mainly by mortality risk factors and, hence, the premiums do not typically differ based on the income-earning potential,” says Krishnan.
The factors determining the premium include age, health, medical history, lifestyle, policy tenure and the sum assured. “However, the sum assured or eligibility offered may differ for a non-earning applicant, which may affect the overall premium,” adds Varun Agarwal, Head of Term Insurance at Policybazaar.
The premiums vary only slightly among insurers (see table). A `50 lakh cover bought online for a 30-year-old homemaker, till 60 years of age, costs between Rs.5,000 and Rs.7,000 a year. For instance, ICICI Prudential Life Insurance’s iProtect Smart Her plan is available at an annual premium of Rs.6,129, while Axis Max Life’s Smart Term Plan Plus comes for Rs.6,167 a year.
Most of these plans offer free and paid benefits, in addition to the standard features. Free options typically include health benefits for a specified amount, early payout or premium waiver upon diagnosis of a terminal illness, and a premium refund upon exiting at a specific age, among others. Paid add-ons usually include accidental death and disability riders, and critical illness covers.
Individual or joint?
Term plans for homemakers are available both individually and as a joint option with the spouse’s cover. The choice should depend on the family’s circumstances and each spouse’s protection needs. “Separate individual policies can offer greater flexibility because each spouse can be assessed independently and the sum assured, tenure and other policy features can be aligned with their respective needs,” says Shruti Oke, Senior Vice President & Head of Product Management, Tata AIA Life Insurance.
However, a joint life policy can be a suitable option for those seeking a single, streamlined solution to protect their family’s financial future, says Kumar of Axis Max Life.
Pointing out the drawbacks of a joint cover, Bajaj Life’s Krishnan says that the cover for the surviving spouse often reduces or ceases after the first spouse dies and a claim is paid. “This can leave the family under-protected at a time when it’s still needed. Individual policies ensure each spouse’s life cover continues,” he adds.
“While comparing separate and joint life structures, families should look carefully at the sum assured available for each individual, what happens to the surviving person’s cover following a claim, policy tenure, premium payment terms, exclusions and other conditions,” says Oke. Understanding policy continuity after the first claim is particularly important when evaluating the two plans.
Agrees Bansal: “Families should check whether the surviving spouse remains covered, whether future premiums continue or are waived, and how and when the respective death benefits are payable.”
Calculate the economic value of a homemaker’s work
Put a price on everything she does, and the total is sobering. Here’s how the family could propose a cover, though the insurer will take the final call based on its own underwriting and capping limits.
*Values and periods are indicative and will vary for households. Inflation not considered.
Eligibility & documents
Though specific eligibility requirements vary with insurers and term products, applicants are typically expected to meet the insurer’s minimum education and age criteria applicable to term plans. “They may also consider factors such as the spouse’s occupation and the household’s overall financial profile while assessing the application and determining the appropriate coverage,” says Krishnan.
Documentation depends on the product, sum assured, and applicant’s profile, “but the starting point generally includes know-your-customer (KYC) documents, as well as age and identity proof, such as address, ID, PAN and photographs, along with any medical records or tests requested by the insurer”, says Bansal.
Insurers may also require the spouse’s income proof, such as salary slips or income tax returns, and details of the spouse’s existing life insurance coverage. Medical tests may also be required depending on the applicant’s age and the amount of coverage being sought.
