Thursday, 26 December, 2013

Importance of Insurance - Part 5

Be safe or You'll be sorry! Part 5
Choosing the right Life Insurance Policy

Here's the next part of my continuing coverage on Insurance. You would have read my earlier post on Choosing the right Life Insurance Company:

By now, you'd be clear about whether you need a Life insurance cover, the quantum required and the company / companies from which it is OK to buy a life insurance policy.

In this post, I propose to talk about how to identify a suitable life insurance policy...

Some points to note:

  • As a thumb rule, I dislike combining insurance and investment. Reason is quite simple - Lack of transparency. And in any case, once you decide to make an investment, especially for the long term, you would like to base your decision on factors such as returns, risk, liquidity and flexibility of shifting to better investment options and/or fund managers from time to time. Whereas, life insurance products should be bought primarily (almost exclusively) on the basis of reliability of the actual assurance given by the life insurance company to honour its commitment to cover the risk of your life. To combine two such diverse objectives would lead to certain lack of clarity and perfect confusion.
  • Hence, if a life insurance policy promises to return any quantum of money during the life time of the policy holder, be clear in your mind that they are combining insurance and investment. Such policies will usually come under the garb and nomenclature of money-back policies, endowment policies, return of premium policies, Unit-Linked Insurance Policies (ULIPs), etc.
  • All such "insurance+investment" policies, in my opinion, have the potential and high likelihood of turning out to be bad choices for a vast majority of people. In all such policies, a part of your premium is used for providing a risk cover. The balance part is used to make investments and provide you the returns. And in most such policies, you don't know the break-up of how much of your premium is going to cover the risk and how much is being invested. The portion which is invested, if invested in "debt products" such as bank deposits, government or quasi-government bonds, etc., the returns you get are sub-optimal vis-a-vis what you will get from making pretty much from the same bank deposits, bonds, etc. The reason: They have to "manage your money" and hence they incur certain administrative costs - Such costs are obviously deducted from the returns generated from your investments. In case of the investment portion being deployed in equity products, you are "stuck" for a really long time with that fund management house. If you were to invest the same directly, you will deploy the same in mutual funds which can be sold off if you find the fund performance inadequate or if other better options are available.
  • Hence, in a nutshell, when you are covering your life, make sure that you do just that and nothing more. Go in for a very simple, easy to understand, "no return of money till you die" kind of life insurance policy. They are typically categorised as  "Term Insurance Policies".
  • The concept of term insurance policy is very direct and simple: They take your premium and provide a risk cover. During the term of the policy, if something untoward were to happen and if the policy-holder dies, the insured amount as per the policy is paid to the nominee. If the policy holder were to remain alive at the end of the term of the policy, he/she can simply be happy that he/she is still around to crib about all those premium payments "going waste". He/she gets nothing in return. To understand this in a proper context, it is similar to insuring your car / two-wheeler. In case your vehicle gets involved in an accident, you can claim the amount lost from the insurance cover subject to the policy amount. If your vehicle does not get involved in any accident, most rational human beings don't feel sad or disheartened by it. On the contrary!
  • Now that you've hopefully decided to go in for a "Pure Term Insurance Policy", you are free to choose virtually any term insurance policy from those that are offered by the life insurance companies that you have shortlisted. A good and sensible option would be to choose the specific term insurance policy where the premium payment is the least. Obviously, it is preferable to have a policy which provides a cover for the maximum duration of time (ideally till the very end of your life on this planet).
  • In this context, you must seriously consider the relatively recent development of "Online Term Insurance Policies". These policies often provide an insurance cover at much lower premium vis-a-vis traditional Term Insurance Policies. This is because they are offered directly by the insurance company and a vast majority of the process is being done online and hence at a much lower cost. This elimination of middlemen (the insurance broker, insurance agent, etc.) and the reduction in process costs is passed on to you by way of a lower insurance premium.
  • Hence, my vote will be to go in for an appropriate Online Term Insurance Policy. Go for it. Go for it TODAY!


All that I've stated above happens to be quite valid - no conditions apply. However, it is imperative to remember the following:

  • Once you decide that you need a life insurance cover, it is better to have ANY LIFE INSURANCE POLICY than to have NO LIFE INSURANCE POLICY.
  • Hence, it is actually better to have one of those sub-optimal policies that I've described than to have NO LIFE INSURANCE POLICY.
  • The much desired Online Term Insurance Policy that you have identified must obviously be bought. But if you are under compulsion to buy some other policy from a friend / relative / spouse's relative / classmate, etc., it is actually better to buy such a policy from such a source than NOT to have any life insurance cover. If possible, minimise the latter and go in for a good quality term insurance policy over and above the sub-optimal policy.
  • In any case, if you already have one or more of those sub-optimal insurance policies (the baggage of history), DO NOT discontinue such policy / policies till at least three months AFTER you have received the policy papers from your carefully chosen Online Term Insurance Policy.

Critical words of wisdom:

  • You need to remember that the sole purpose of making premium payments for a life insurance policy is to ensure that you do have a life cover. You do not wish to be in a situation where after the demise of the policy-holder, the nominee fails to get the insured amount due to some fault while filling up the form or due to some intentional/inadvertent false declaration while filling up the form. Hence, while taking such a life insurance policy, make sure that you are very meticulous when it comes to filling up the proposal form. Ideally, you MUST fill it up all by yourself. Even if an agent were to fill it up, you must ensure that every single item in the form is filled up accurately and truthfully.
  • Especially, you must be very particular about the spellings of your name and that of your nominee. There must be NO MISTAKE in such basic details such as postal address, contact numbers, email addresses, nominee details, details of the chosen policy (including sub-options that may be applicable), Date of birth, etc.
  • And, having a medical check-up done by the insurance company's team of doctors is actually an ideal situation. Once that's done, they will not be in a position to reject a claim later claiming that the policy-holder did not declare his/her true medical condition.

In my next few posts, I plan to write about health insurance policies.

Watch this space!



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