In this episode of Dhan ki Baat, Md Shahid, Product Head and Director - Insurance, IIFL, explains how to choose the right insurance plan for life cover and investments to achieve life goals.
Life insurance is a financial tool which provides financial cover as well as investment avenues to secure long term financial well-being.
The primary purpose of life insurance is to provide an alternative source of income in the absence of earning member of the family. For example, in a typical family, an earning family member supports children’s education, a certain standard of living, home loan, and car loan by way of his regular source of income through employment or business/profession. However, if the earning member meets with an accident or dies prematurely, the family may not be able to manage the aforesaid life goals, as they would not have sufficient savings. Life insurance provides financial security against this uncertainty.
The other major important role life insurance plays is that it acts as an investment tool, which keeps you invested for a long period of time. It would help you achieve your long-term goals such as buying a home or planning your retirement. For investment purposes, there are different types of insurance plans, which include market-linked insurance plans that have risks and returns aligned with the market or endowment plans that usually provide assured returns on investment having no link with the market.
For people taking life insurance cover, the single most important aspect they must be careful about is that the life insurance plan must be based on their life goals and financial security. Unfortunately, as per current industry practice, people mostly buy life insurance to save tax or to attain high return on investment. However, the matching of the insurance plans with customer needs will serve the correct purpose and help achieve their life goals.
The life goals of a person are mainly driven by the various life stages. Hence, one should assess the same, define life goals/financial needs in those life stages and choose life insurance plans that best meet the requirements. The financial needs and insurance plans in each of the life stage have been explained below.
Young and single: During the 20s, an individual just steps into his professional life and is relatively debt free. He has fewer family responsibilities and appetite for risk is more. Hence, at this stage, he should consider buying a term cover to cover his life as the term cover premium at young age is also very cheap. With disposable income, he can explore option of investing in ULIP (Unit-linked Insurance Plan).
Married: During late 20s and early 30s, people usually get married and have kids. While his income is higher at this age, the responsibilities are also much more. At this life stage, the person may have financial liabilities like home loan, car loan or funds required for child’s education. At this stage, it is very important for a customer to have a term cover to safeguard his family against loans burden, child education, daily expenses and maintenance of a certain standard of living. An individual should also start savings in an endowment plan to build a corpus for child education, and simultaneously invest in ULIP plans with surplus funds for wealth creation.
Family grown up: During this life stage, an individual’s long term financial liabilities like a home or car loan may be paid-off. However, he may have bigger responsibilities such as child’s higher education, marriage or his own retirement planning. For this, he should invest in endowment plans, which would provide an assured maturity amount after the insurance tenure. Remaining funds can be invested in ULIP for building surplus wealth to further increase the budget for these goals and overall standard of living.
Retirement: When the individual reaches near retirement age, he would require lump sum money to repay all his liabilities or to settle at a location post retirement. At this age, the best option for an individual is to buy an endowment plan, which will help him save and give him guaranteed lump sum amount on maturity and annuity that is payable monthly.
Tax saving instrument: Many people buy life Insurance just to save tax without doing any need analysis. What is missing is an evaluation of how much cover they require to safeguard their family in case of any mishap. They also fail to consider whether they should go for market-linked investments or guaranteed return plans.
Delay in subscribing till one grows old: People tend to buy life insurance at a later stage on the perception that they may not die young. However, if an individual plans to buy life insurance at a later age, the premium may be extremely high. Also, he may be denied a life cover on medical grounds as the chances of lifestyle diseases increase at a later age.
Wrong insurance policy: Life insurance plans are available in multiple options. From ULIPs to endowment plans to term insurance plans, there is a life insurance plan to suit the financial needs of a vast majority of people. Choosing an insurance policy based on recommendations of an insurance agent or opting for the same policy as your friend or relative has may not be in your best interests. One should know his financial needs, check with proper insurance advisors who offer plans of different companies and then choose the appropriate life insurance plan.
Not comparing multiple policies before selection: With a rising number of life insurers in India and each insurer having multiple plans, opting for a life insurance without comparing the policy terms and conditions is a mistake. If an individual is short on time, he should make use of various insurance aggregators, which allow to check and compare insurance policies from multiple insurers on a single platform. He can also interact with current policyholders with the various insurers, and get a detailed insight on customer service offered by the insurer.
Conclusion: life insurance is one of the core financial obligations you have towards your family and loved ones. By avoiding these common mistakes, one can choose an optimum life insurance cover allowing you peace of mind and financial freedom for the future. He should also go through the complete policy details like the term of the plan, returns, charges, features, etc.
Assess your financial goals and insurance needs: List down your financial goals and risks. Seek help from insurance advisors to suggest best insurance plans as per your financial needs. You can alternatively search online to check different plans.
Decide how much coverage you need: In case of term insurance, you should define how much funds your family may need in order to maintain the same standard of living and achieve life goals even in your absence. For endowment and ULIP plans, you should define how much corpus is needed to meet your life goals like house purchase, child’s education, child’s marriage, retirement planning. The maturity amount should be decided as per the financial needs.
Compare different insurance policies: Compare different plans of different insurance companies. The things you should compare are product features, price, returns, terms and condition.
Be sure you can afford the premium payments: Before purchasing a life insurance policy, you should ensure that you can handle premium payments. You should also make provision for paying higher premium in case of any change in life goals or financial needs.
Review your life insurance program every few years: Throughout the policy tenure, you should review that you have sufficient financial security as well as you are comfortably achieving your life goals. If the family size increases, you may require a higher financial cover as well as higher financial corpus for life goals. Review your policy with your insurance advisor every few years to keep up with changes in your income and needs.
Mr. Md Shahid has been with IIFL since October 2014 and is presently the Product Head and Director in Insurance. He is a strategy professional with 6 years of experience in financial services and management consulting. In IIFL, he worked on key strategic projects in CEO Office like venturing into new business, new product and other initiatives for the existing businesses. Prior to IIFL, he was part of Management Consulting in PricewaterhouseCoopers (PwC) focusing on business strategy, deal advisory in post merger integration. He is a CA, CFA (US) and B-Com (Hons) from St. Xavier’s Kolkata.
Life Insurance is a contract between the insurance company (insurer) and the policyholder (insured). In return for a consideration (the premium), the insurance company promises to pay a specified amount to the insured in the event of death, disability or critical illness.Life insurance ensures financial protection on accident or death. It enables maintenance of the same lifestyle even after the unfortunate demise of a loved one. The beneficiaries can utilize the monetary benefits to replace the income one would have earned or help pay off debts or other expenses. Life insurance boosts the confidence of the insured, and offers satisfaction of being covered for illness, life or financial loss.
It absolutely depends on the priorities of different stages of life, which can be as follows:
Protection of future income
Protection for self and family from medical/health problems
Planning for education
Planning for marriage
Protection against home and car loan
Planning for retirement
Unit-linked insurance plans offer the benefits of both life insurance and returns on investment. They give the insured the option to participate in the growth of the capital markets. On the death of the insured, the sum insured or the market value of the investment (fund value), whichever is higher, is paid. On maturity of the plan, the fund value is payable. Returns are subject to movements in the capital markets or debt market where investments such as equities (shares) or bonds (debt) are transacted. Unit-linked policies carry a higher risk than with-profit policies and contain fewer guarantees. However, they are much more flexible. Unit-linked policies are suited for people prepared to undertake some investment risk to obtain the benefits of flexibility.
One can purchase the policy conveniently and avail attractive web rebates if purchased online. The individual uploads all his data online and submits the same to the insurance company. The insurance company does the necessary medical check-ups, accepts/rejects the proposal and informs the insured through mail. The premium is usually cheaper when buying term insurance online. When a product is specifically designed for online sales, the distribution cost is saved and the benefit is transferred to the policy holder.
The most important tool you can add to your life insurance policy, is a rider. Riders are additional provisions made to an insurance contract, to extend or reduce the benefits payable by the policy. They can also affect the overall policy quote. Knowing how riders can get you extra benefits is a great boost to your ability to customize your insurance policy.
Benefit illustration in the context of life insurance is a projection of cash flows and benefits pertaining to a life insurance plan.
While forwarding the policy to the insured, the insurer will inform the policyholder by letter that they have a period of 15 days from the date of receipt of the policy document to review the terms and conditions of the policy. Where the insured disagrees with any of the terms or conditions of the policy, they have the option to return the policy stating the reasons for their objection. The policyholder is entitled to a refund of the premium paid, subject only to a deduction of a proportionate risk premium for the period on cover, the expenses incurred by the insurer on medical examination of the proposer and stamp duty charges. This 15-day period is known as the free-look period or the cooling off period and it is standard for all the policies.
The sum assured is generally referred to as the amount of insurance in a policy. The sum assured is actually the reason for which we buy life insurance. It is the amount that would be paid to the nominee in case of the death of the insured person and plays a crucial role in determining the premium one has to pay to get the policy. Sum assured is the minimum death benefit in an endowment policy.
Premium paying term (PPT) is the period during which the policyholder pays the premium. It can be equal to or less than the total policy term.
The amount received by the nominee at the time of death of policy holder during the policy term is called death benefit. It is generally sum assured in addition to the bonuses in endowment policies, sum assured or fund value (whichever is higher) in ULIPs.
A proposed insured is a person whose interests are protected by an insurance policy. For example, if you are the individual whose life is going to be covered under the insurance policy, then you are the proposed insured.
Please see the below table
|Marital Status||Non working Woman|
|Married||50 % of husband's cover or Rs 25 L whichever minimum|
|Unmarried / Divorcee||No cover|
There is no effect as such for base cover. Only accidental injuries suffered under the influence of alcohol resulting into disability or death will not be covered (Only disability claim and accidental death benefit portion of death claim payout is not payable).
Below are some of the reasons for claims rejection: Lapsation status of policy on the date of incidence of claim, non-coverage of a particular event/loss as per policy conditions, loss not qualifying under the definition of loss either marginally or totally as per coverage definition, losses falling under exclusions.
Depending on the product, your premium could be a one time "single premium" plan or a "regular premium" plan. In case of a regular premium plan, you will have the option to pay premiums either annually, half yearly, quarterly or monthly, depending on the product you take. Payment of renewal premiums online have also been made very simple.
You may visit any branch office and communicate these changes at the policy servicing department, or else log on to the customer portal and change the address there online.
You can surrender your policy before maturity. Post payout of the Surrender Value, the policy gets terminated. A policy acquires Surrender Value and payout of the surrender value will be dependent on the specific product category & features.