Pankaj is a 32 year old engineer, working in a software firm. He is admired for his attention to detail and prudence in both his professional and personal life. When buying a small thing like a mobile phone, he makes sure he does enough research on available models and then chooses the one with maximum features, within the budget he has. Unfortunately, when it comes to making financial decisions like buying a life insurance policy for himself, rather than doing the same amount of research and planning, Pankaj relied merely on his relative’s advice, who was helping his insurance agent friend to meet his target. Now, he is unhappy as he is stuck with the policy, which really doesn’t meet his savings and protection requirement.
Alas, you will find many Pankajs around you. While they do a fair amount of research before buying things like a mobile phone or a television, when it comes to big financial decisions like planning for retirement or their children’s education or marriage, the same attention to detail and research is lacking. They often make decisions in haste, or depend on their friends or family for advice without evaluating the features and benefits that they can avail from various policies.
So, how do you go about evaluating the life insurance you need, how much you need, and the best suited for you and your family?
Here are the steps to follow and things to keep in mind:
Determine the objective of life insurance
The first step in buying life insurance is to decide the purpose or the need for which you want to buy a cover. Life insurance can help you provide a financial umbrella to your family in your absence, fund your child’s education and marriage or help you plan your retirement. It is advisable to consult an advisor or your relationship manager at the bank to help you determine the cover and disciplined savings you need and arrive at the most suited life insurance solution. Always insist on doing a detailed need analysis and risk profiling which will help you at the time of decision making.
Understand the terms and categories
Life insurance is usually structured as either a term plan, traditional endowment plan, unit linked insurance plan (ULIP) or a retirement or a pension plan. A term plan essentially covers the risk of death of the policy holder. It is substantially cheaper than other categories of life insurance and may or may not return the premium in case the policyholder is surviving on maturity. On the other hand, a traditional or endowment policy is a non-market linked plan that combines savings and protection and pays a fixed lumpsum upon maturity or death of the policyholder. ULIPs are market linked long-term savings cum protection plans but differ in their pay out structure and equity-debt ratio of investment. Retirement plans could be on either traditional or ULIPs platform and have compulsory annuity plan on maturity of accumulation phase. It is important to choose a plan based on your end objective and risk appetite. Riders are the additional risk cover which help in customising life insurance solutions. Further, it is always beneficial to gain an understanding of common terms like cash value, maturity amount, premium, equity-debt ratio and claim amount
to ensure you understand your policy document.
Do a thorough check on the life insurer and its plans
Once you have determined how much cover and which type of life cover you require, it is imperative to do a search on various plans and life insurers available in the market. Check the insurer’s customer feedback, their financial stability, past track record, claim settlement ratio and available riders as well exclusions of the policy. It may be a good idea to consult an advisor or relationship manager and go through an illustration or a full working example with your expected maturity amount to see your premium and how your shortlisted life insurance policy fares on your protection and savings requirement.
Evaluate various modes of buying
There are various channels or modes available for buying an insurance policy. In addition to directly buying from the insurer, you can always get in touch with a trusted advisor to help you purchase the desired policy and clear any queries on the free look period, claim process, policy charges and capture accurate personal details and declarations. Some plans give additional benefits to women and teetotallers. It is worthwhile to check if you can avail these benefits while buying your life cover. Further, many riders are allowed to be added at the beginning of the policy, so check with your insurance provider on which rider can give you an added advantage. In addition to agent advisors, today, simple life covers are just a click away. Many insurers are enabling customers to buy term plans online with affordable low premiums. Additionally, banks and other financial distributors also provide life insurance policies under corporate agency or broker tie-ups and their employees are well trained by life insurers to provide a need based advice.
By following the above steps, you can make an informed-buying decision and ensure that your insurance policy is based on your unique needs and offers you the maximum advantage. Having done a thorough check and evaluation of various options, you will have the peace of mind that your chosen life insurance policy or mix of policies meets your needs and will eventually provide financial security to you and your loved ones.
Lastly, life insurance is a long term investment. The sooner you start, the more advantage you have with time on your side.
The author is Senior Director & Chief Distribution officer, Max Life Insurance