Here we go with the first one, I would like to put a couple of questions straight. Did you ever buy a life insurance ? and Why did you buy it? More are less we all have insurance or at least planning to have one. If you don't belong to both of them then another question for you is how do you manage your risks?. Well before we talk about which policy suits you , lets see why do we need one.
Does everyone need Life Insurance?
Obviously not. Everyone doesn't need to be insured, the persons who have dependents only need to be insured. Let me explain, If you are the earning member of your family and your sudden demise put your family in financially uncomfortable position then you need an insurance. And the need is very high if you are the only member of the family who is earning and whose demise makes the family struggle even to survive. On the other hand you live alone without any dependents you do not need an Insurance, let us look at few other people who doesn't need one .
- Non-earning members
- Who live alone (they are called Perpetual Alpha)
- Who are wealthy enough to self-insure and
- Immortals
How much is too much Insurance?
Once the need of having an Insurance is identified , there comes a follow up question. How much should I get Insured? and What type of Policy do I need?. It is a well accepted fact that life of humans is invaluable but on other hand the insurance companies have their own tool to value your life . And they call it Human Life Value , you can find the calculators online . Here is one if you want to use
These calculators do help you to arrive at the Sum Assured required for the Individual. Well if you need an alternative, then you can make your own calculation based on your requirements. The only problem is you might not get an insurance if its too high than the value by HLV and the cost of insurance can also shoot up manifold. But remember the objective should (in case you die prematurely) be that the dependents should be able to maintain their standard of living at least for few years before they can find an alternative arrangement.
And it is true just insuring is not enough for managing the risks. It helps to manage only few risks and only to a certain extent.
After nailing down the number of Sum Assured , we should try to zero in on the policy. There are various types of the policies like Term life, Endowment, Whole life etc.. The insurance companies can create practically thousands of policies by using various conditions and options on the policies(called riders). Well I am not going deep into the types of plans as it is a complex issue which needs a special discussion exclusively on it.
But wait a minute I would like to tell about one type of plan which usually the Insurance agents do not tell you. And the simple reason being low commissions on these plans. What is the type of plan am talking about ? It is called a term plan. It is a basic of all the insurance plans, it covers life only up to the term period. Which means after the expiry of the term you don't get anything. The sum assured is paid to the nominee if the insured die during the term. Well that is disgusting right? you pay an annual premium for the entire term and you get nothing at the end of the term which is very depressing to many. But hold on for a second thought, the key benefit of having a term life is that you can get a very high sum assured with a very low cost.
And remember the objective of having a insurance is to cover risk not to have return. If you miss this basic principle , which many do. Get ready to loose out on your money for a life time.
Who is the Right Insurer?
The long standing insurance player in the industry is LIC. The main advantage enjoyed by LIC is it has a large base of policy holders, as the game of insurance is played on law of large numbers. The game is won always by LIC for its sheer ability to reach millions of people than anyone else.
But there are lot of private players with the help of foreign Insurance companies have their business in India. And the problem with these players is that they may not pay your claims. This has been the problem with the many new insurers. So we need to be careful while choosing an insurer, dont choose an insurer purely on cost basis. As it may cost less today but will cost more when your nominee make a claim and adding fuel to the fire the family who lost you should start fighting with the insurer to get the claim. So always check the claim rejection ratio of your insurer before buying a policy from it.
Who do you go for the advice for?
Ideally we should take the advice on our insurance needs from an adviser who is well educated in the subject matter and considered as an expert in this matter. But the way Insurance sold in India and people buying on advice on incompetent brokers, agents etc...is far below the acceptable standard. We tend to take advice on our insurance from the agents of insurance companies, which i guess you should think on . An insurance agent say from XYZ company comes and sells you the products of that company alone. And he is more interested in selling his products for commission than the applicability of the policy to your situation. And even the training and certification of insurance agent is sufficient only up to understanding of products and they are not trained on a broader concept of financial planning. So next time your collegue or uncle or somebody whom you know might be an insurance agent. Do not buy an insurance just to keep your someone happy. Take a policy that suits you.
