Before you buy such a long term product, let’s get some smart checks done. Follow a rational approach to decide the cover, look at the features and your requirements and select the Company, try and split the cover across two companies, avoid tenor beyond your retirement age, buy through an adviser if he adds value, fill in all information yourself, avoid combining insurance and investment, prefer online for cost inefficiencies, opt for MWPA and avoid single premium policies.
We recommend you to consider the following guidance: –
Decide the amount of the cover and your budget: You can use popular calculators available on internet on various personal finance websites and arrive at a value of the additional life insurance you need for yourself. Remember that Insurance works on a principle of indemnity. This means that you should look at Insurance to indemnify against the loss, and not to make a profit. Read our earlier article on 22-Nov-2013 in this column to get more idea about how you should calculate your life insurance requirement
LIC or Private Sector Players: LIC has an excellent goodwill and a track record. This also generally means a significantly higher premium you pay, for term plans, as an example. The Private sector players on the other hand are far more price competitive due to online model and other factors. Based on your budget, preference and amount of cover, you can decide if you like to go for LIC or one of the Top Private Sector player.
Split the cover: If the amount of cover is high, say Rs. 50 Lakhs or above, then you should split the cover across two companies. This has two important advantage. If your family makes a claim upon your death and if one of the Company rejects the claim and if the other one settles the claim then your family has a stronger case to approach the regulator and ask for intervention. Another advantage is that you can have flexibility to continue one policy after few years and surrender the other one, if your insurance requirement has reduced.
Duration of the Policy: Your life insurance need is a function of your financial liabilities. If you have surplus financial assets to take care of your financial liabilities, then you don’t need to spend on life insurance cover. In most cases, with increasing age, your financial assets increase and your financial liabilities decrease, progressively. Once you retire, the economic dependence on you reduces drastically. We normally advise to take cover with a duration that ends near your retirement age.
Declarations: Remember that honesty is the best policy in life. We suggest you fill in the application forms yourself and take adequate care to disclose all material facts. Hiding information about your present medical status (e.g. Diabetes, High BP) is not in the best of your interest. With medical advancement, insurance companies have access to superior techniques that bring out the true picture of your health, anyway.
Buy through an Adviser or Direct? Check with your adviser on the level of service that he can provide to you. You should ask him to present you a comparison of product with his recommendations. Your adviser may add value in case of premium loading, medical tests, MWPA, Insurance dmat account opening and most importantly, help your family to raise a proper claim when you are not around. You should understand if going through an adviser will increase your total cost. Based on this, the level of services being provided and value being added, you could decide if you need an adviser to assist you
Which Policy to buy? Study the comparison of leading insurance policy on various websites on internet. Compare your requirements against the product features and narrow down your search to 2-3 good policies. Consider visiting 2-3 websites and review their recommendations. Avoid depending upon a single source of recommendation. Review benefit illustration table before you finalize a policy. For a term plan, there is obviously no benefit if you survive the policy maturity. However, we still recommend you to review the benefit illustration table as you will be able to identify any hidden costs.
Insurance and Investment:Normally, treating your insurance and investment separately works out far better for you. When Insurance and Investments are combined, you are likely to be going in for a complex product structure like ULIP. These are also likely to be expensive. In the best of your financial interest, taking an online term plan and using rest of the surplus for goal based investments as per your risk profile, is likely to be a far better option.
MWPA. Getting a policy issued under Married Women’s Protection Act (MWPA) will ensure that upon your death the insurance proceeds go to your family and cannot be used to pay your liabilities, if any. This is helpful when you are a businessman or a professional with a liability exposure
Regular Premium or Single Premium: Regular premium is likely to give you a better opportunity to absorb the tax benefits. In a single premium policy, your effective cost of insurance may work out higher if you die in the early years as you would have paid in advance for all the years. You may have a better use of money for other financial goals. With more and more innovative features coming in, it makes sense to retain the flexibility with you. So normally it makes sense to go for regular premium policy. In case you do not have a regular income source and would conservatively likely to ensure that insurance is in place, once and for all, then single premium policy may be your preference.