5 Things to Know before you buy Insurance

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Today young people have more surplus money, have higher aspirations and responsibilities and are more responsible.  So it might be useful for you to get some distilled knowledge and experience on the subject of buying insurance. Here are a few things that you need to keep in mind before you buy insurance. This article is about life insurance and ensuring continuation of income in your absence.

How much insurance do I need?

You need to decide over a figure that will ensure a continuation of income for your family. Let us start with the monthly expenses of your family. For example if it is Rs 25K and you are away for two months, you will ensure that you leave around Rs 50K for your family.

Similarly, when you are figuring out the amount of insurance, you must plan for a figure that will ensure maintenance of your family in your absence.

To get an annuity of Rs 25,000 every month, you need to invest Rs 30 lacs which gets you 10% return annually. You can toggle with the expected rate of returns, family assets, spouse income generation capacity to fine tune your insurance requirements.

What type of insurance?

Insurance can be classified under three types depending on coverage of 1. Risk, 2. Savings and 3. Investments. So under the risk coverage, you have term insurance plans which cover the risk alone. There is no maturity payouts when the term of the insurance plan is over and there is no unfortunate event to trigger the claims process. For a Rs 10 lac cover, the premium for a 30 year old can vary from Rs 2K-3K only.

Insurance company also offer endowment and money back plans where they also have regular survival benefit payments/loans and maturity benefits if you survive the term of the product. This is popular.  But the benefits also come at a cost of higher premium. For a Rs 10 lac policy, the premium would be approx. Rs 50,000. And the return of these policies do not exceed 6-7%.

In the last few years, ULIPs have become a rage. Though the entire risk of returns is borne by the policyholder, only part of your premium is invested in the stock markets and the cost of this investment is significant, ULIPs have generated a lot of sale. Perhaps the lure of attractive returns in the future and the commission structure have helped in the hot sale of ULIPs.

Who is the best Insurance provider?

LIC is the market leader. But this doesn’t mean that all the other private insurers aren’t good. Most private insurers have flexible products and high service standards. And when it comes to solvency margins, all of them are at par. So no insurer will run away with your money!

More important than the insurer is the intermediary between you and the company. I would prod you to check on the credentials and professional standards of the agent/advisor before deciding on which insurance company to buy from.

What is the cheapest & best product?

Cheap may not be the best. However there is a huge advantage these days in buying insurance online. Online products that are available for risk coverage are AEGON Religare iTerm plan, ICICI Pru iProtect, Kotak Life e-term and Kotak e-Preferred Term, MetLife Met Protect and Future Generali Smart Life.

Online buying gives you the cost advantage as the distribution costs are shaved from your premium.

But you need to be very net savvy and be able to take care of documentation yourself. I am also not very clear about the service standards of online products. Especially what will happen in your absence when there is no intermediary to take care of the formalities.

Again, I would suggest you to devote time in finding the right agent/advisor instead of finding the cheapest and best product.

How do I ensure best services?

There are small things to take care about. Like there is no error in the proposal forms that you submit to the insurer. Remember, taking an insurance policy is a two way contract where the insurer covers the risk based on your statements. It is based on good faith. Remember to check the policy bonds for any errors like the address and nominee details.

Next, you need to take proper care of the documents. A proper filing system for your personal finance papers is useful. Plus it’s important that the family members are aware of the documents & their location too. Also remember to pay the premiums in time.

At the cost of repetition, I would urge you to do research when it comes to finding the right agent. If you have the right agent, he/she will take care of all the above questions.