Life Insurance Buying Tips
Which life insurance policy to buy? It’s a tricky yet critical question that does not have a simple answer.The market offers a bouquet of products which look very similar but boast unique selling propositions (USPs). Each person’s peculiar requirements and needs - what, when, how much - vary. Then there is the free advice dispensed by friends, advisors, colleagues and family membe. Information overload, therefore, could confuse the prospective policy-buyer.
Unlike in tangible products, the quality of a life insurance policy is discernible only when a claim is made either on maturity or upon death. For vehicles, the sum assured is directly correlated to the vehicle cost. Not so for people, including vehicle-owners The sum assured could be half the value of the vehicle! In many cases, the policy-holder does not even know how much he is insured for. Some people might even wonder whether they need insurance.
Here’s a story, probably apocryphal, that typifies the Indian life insurance market. On a village road, a person ran his car over a hen suddenly, killing it. The hen-owner demanded compensation. The driver offered `200 which the hen-owner rejected, and instead demanded `25,000. The stunned driver wondered at the figure.
The hen-owner explained that the bird used to lay two eggs per day, each one fetching Re 1. That’s `2 a day in earnings, or `730 a year. Since he expected the hen to lay eggs for at least 30 more years (!) before it was sold off finally (or dies a natural death), he valued the hen at `25,000.
Well, that is an example of the value of future life. Isn’t it amazing that, unlike the hen-owner in the story, most people fail to make the right assumption about their own worth, and even conveniently neglect the task?
To be fair, every person’s needs are unique, so how can two individuals be recommended the same products? But insurers do precisely that, that too for millions of potential customers, by playing on the latter’s fear (mainly of death and of the bereaved dependents’ woes) and perceived tax benefits.
Yet, life insurance is a must, irrespective of whether people die prematurely or live long. Oddly, most insurance-buyers do not fully understand the features, advantages and benefits of insurance products. This ignorance and indifference need to change, particularly if it is a long-term product whose benefits go to the nominee(s).
The best way of buying a life insurance policy is to start with a detailed ‘Need Analysis’ (NA), based on accurate information relating to income, expenses, liabilities, assets, responsibilities and obligations. Any incorrect, manipulated or distorted information in this regard could result in the purchase of a wrong plan.
Generally, it is seen that the buyer has needs relating to protection, savings, investments, pension and annuities. Based on the available Net Investible Surplus (NIS), one or more products can serve the purpose. NA should be done on a yearly basis as one’s life situation tends to change over time.
Here’s an example: A married, male, 35, employed in the private sector, needs to support his homemaker wife, two kids (son, 5, is about to begin schooling; daughter is just 2) and dependent parents.His liabilities include a home loan of `30 lakh payable over 20 years, a vehicle loan of `5 lakh payable over seven years, a debit card outstanding balance of `1 lakh. His investments include a small life insurance policy (with a total sum assured, or ‘SA’, amounting to `3 lakh) of `2 lakh. His monthly income is `50,000 and expenditure is `35,000. So, his NIS is `15,000 per month (or Rs1.8 lakh per annum).
His NIS needs to serve his NA which shows a need for a regular flow of income that can maintain the existing standard of living for his family even in his absence. His liabilities should be fully covered and not affect his family in case of his sudden death. His children’s education, the daughter’s wedding-related expenses in future and post-retirement needs like pension need to be prioritised as well.
His options include banking products, post office investments, mutual funds, shares, bonds, property and gold. He should consider immediate needs (debt repayments, capital for day-to-day needs, children’s education, dependents’ sickness), collective needs (unforeseen or sudden things like sickness, house renovation, overseas travel, school donation, capitation fee) and retrial needs (build-up of capital for post-retirement needs).
With an NIS of `1.8 lakh per annum, no single investment option can cover the three kinds of needs. But, life insurance plans would help in the following way.
Protection plan: A term insurance plan of a minimum SA of `1 crore (at a nominal premium of about ` 20,500 per annum), which would take care of his home loan (Rs 30 lakh), vehicle loan (Rs 5 lakh) and other loans (Rs5 lakh).In case of death, even after paying the first premium of `20,500, the nominee of the insured would get the SA of Rs1 crore.
Child plan: Two policies, each of `25,000 per annum and of different tenures (13 years for son, 16 years for daughter).The children would get lump sum when they turn 18 (when the savings plan involving periodic payments offers end-of-term sizeable capital, and waives off future premiums, if the insured dies prematurely).
In addition, the person could invest in unit-linked plans (with monthly or quarterly premiums; and with ‘65%in equity and 35% in debt’ as a guideline), and in plans relating to annuities and pension.
Well, that is just an example. Buying the right life insurance plan is an art, but it must be done scientifically, paying attention to various factors.
The Author is executive director - marketing,SBI Life Insurance Company.
Article Source: http://www.dnaindia.com/money/report_a-few-things-you-should-know-when-buying-life-insurance_1631037
Unlike in tangible products, the quality of a life insurance policy is discernible only when a claim is made either on maturity or upon death. For vehicles, the sum assured is directly correlated to the vehicle cost. Not so for people, including vehicle-owners The sum assured could be half the value of the vehicle! In many cases, the policy-holder does not even know how much he is insured for. Some people might even wonder whether they need insurance.
Here’s a story, probably apocryphal, that typifies the Indian life insurance market. On a village road, a person ran his car over a hen suddenly, killing it. The hen-owner demanded compensation. The driver offered `200 which the hen-owner rejected, and instead demanded `25,000. The stunned driver wondered at the figure.
The hen-owner explained that the bird used to lay two eggs per day, each one fetching Re 1. That’s `2 a day in earnings, or `730 a year. Since he expected the hen to lay eggs for at least 30 more years (!) before it was sold off finally (or dies a natural death), he valued the hen at `25,000.
Well, that is an example of the value of future life. Isn’t it amazing that, unlike the hen-owner in the story, most people fail to make the right assumption about their own worth, and even conveniently neglect the task?
To be fair, every person’s needs are unique, so how can two individuals be recommended the same products? But insurers do precisely that, that too for millions of potential customers, by playing on the latter’s fear (mainly of death and of the bereaved dependents’ woes) and perceived tax benefits.
Yet, life insurance is a must, irrespective of whether people die prematurely or live long. Oddly, most insurance-buyers do not fully understand the features, advantages and benefits of insurance products. This ignorance and indifference need to change, particularly if it is a long-term product whose benefits go to the nominee(s).
The best way of buying a life insurance policy is to start with a detailed ‘Need Analysis’ (NA), based on accurate information relating to income, expenses, liabilities, assets, responsibilities and obligations. Any incorrect, manipulated or distorted information in this regard could result in the purchase of a wrong plan.
Generally, it is seen that the buyer has needs relating to protection, savings, investments, pension and annuities. Based on the available Net Investible Surplus (NIS), one or more products can serve the purpose. NA should be done on a yearly basis as one’s life situation tends to change over time.
Here’s an example: A married, male, 35, employed in the private sector, needs to support his homemaker wife, two kids (son, 5, is about to begin schooling; daughter is just 2) and dependent parents.His liabilities include a home loan of `30 lakh payable over 20 years, a vehicle loan of `5 lakh payable over seven years, a debit card outstanding balance of `1 lakh. His investments include a small life insurance policy (with a total sum assured, or ‘SA’, amounting to `3 lakh) of `2 lakh. His monthly income is `50,000 and expenditure is `35,000. So, his NIS is `15,000 per month (or Rs1.8 lakh per annum).
His NIS needs to serve his NA which shows a need for a regular flow of income that can maintain the existing standard of living for his family even in his absence. His liabilities should be fully covered and not affect his family in case of his sudden death. His children’s education, the daughter’s wedding-related expenses in future and post-retirement needs like pension need to be prioritised as well.
His options include banking products, post office investments, mutual funds, shares, bonds, property and gold. He should consider immediate needs (debt repayments, capital for day-to-day needs, children’s education, dependents’ sickness), collective needs (unforeseen or sudden things like sickness, house renovation, overseas travel, school donation, capitation fee) and retrial needs (build-up of capital for post-retirement needs).
With an NIS of `1.8 lakh per annum, no single investment option can cover the three kinds of needs. But, life insurance plans would help in the following way.
Protection plan: A term insurance plan of a minimum SA of `1 crore (at a nominal premium of about ` 20,500 per annum), which would take care of his home loan (Rs 30 lakh), vehicle loan (Rs 5 lakh) and other loans (Rs5 lakh).In case of death, even after paying the first premium of `20,500, the nominee of the insured would get the SA of Rs1 crore.
Child plan: Two policies, each of `25,000 per annum and of different tenures (13 years for son, 16 years for daughter).The children would get lump sum when they turn 18 (when the savings plan involving periodic payments offers end-of-term sizeable capital, and waives off future premiums, if the insured dies prematurely).
In addition, the person could invest in unit-linked plans (with monthly or quarterly premiums; and with ‘65%in equity and 35% in debt’ as a guideline), and in plans relating to annuities and pension.
Well, that is just an example. Buying the right life insurance plan is an art, but it must be done scientifically, paying attention to various factors.
The Author is executive director - marketing,SBI Life Insurance Company.
Article Source: http://www.dnaindia.com/money/report_a-few-things-you-should-know-when-buying-life-insurance_1631037
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