Life Insurance Buying Guide

 

Life Insurance policy is one of the best ways to secure financial future of your family and sometimes yours too. It is likely that you have bought a life insurance policy already or would buy in the future. It is also likely that you may have received multiple presentations from different insurer’s representatives. On one hand insurance intermediaries would vouch for their presented plans, yet on the other hand some investment experts, bloggers and youtubers would counsel you to consider only a particular type of plan and ignore the rest. Some “experts” would clearly insinuate considering other categories as half-witted. Hence, the ordinary buyer would either be confused or would form a vague opinion and ready for impulsive decisions.

 

In this article let us explore afresh life insurance and the various types of life insurance policies. Let us revisit what kind of policies you should buy and more importantly how do you identify the right policy for you.

 

 

Life Insurance is a contract between the Insurer and the Policyholder where the insurer on untimely death of the policyholder agrees to pay the policyholder’s beneficiary an amount equivalent to the death benefit in consideration of the policyholder paying the insurer an amount called the premium. This premium may be paid at one go or usually over an extended period.

 

There are a variety of life insurance products available in the market today. With almost 25 life insurers currently operating in India and each insurer having multiple brands of their own, the ordinary buyers have a problem of plenty. To identify the most suitable plan amongst multiple brands is indeed a challenge. We are best served categorizing the various life insurance policies and then attempting to choose our preferred brand within that category.

 

This article will attempt to address the following common concerns—

  1. What is Life Insurance
  2. How many types of Life Insurance policies are available
  3. Should I buy only Term policies and invest the rest in Mutual Funds
  4. How do I choose my insurer
  5. What are the buying options.

For the record, all life insurance brands in India can be categorized in just two categories. Pure Insurance and Investment-linked life insurance policies.

Pure Insurance policies commonly known as Term Insurance have a fixed term. These policies mature only on the unfortunate death of the policyholder within the specified term. If the policyholder survives the term, there is no maturity benefit. Term Insurance policies help the policyholder buy an adequate coverage at an extremely affordable premium. Hence if you wish to have an adequate life cover to protect your dependents financially or wish to have collateral against a loan, Term Insurance is the ideal option.

Investment Linked policies combine savings and insurance. In these policies, a small part of the premium buys life cover for you and the balance major part is invested to create wealth. Most available insurance brands in India are Investment-Linked policies, hence there are many. Fortunately, they too can be categorized in two categories, Market-Linked policies and Fixed-Income policies.

 

Market-Linked policies are popularly known as Unit Linked Insurance policies, or simply ULIP. While a small part of premium fetches life cover to the policyholder the balance major part is invested in the securities market to create wealth for the policyholder. ULIP policies have a fixed term and a locking period too. The policy proceeds can be encashed at prevailing NAV on expiry of the locking period. ULIP policies invest either in Debt instruments or equity instruments, accordingly there are few variants to choose from. If you wish to invest in securities market to create wealth and simultaneously want a life insurance cover from the same investment, ULIP is an option.

 

Some investment experts opine that a combination of Term Insurance and an SIP in Equity Funds is a better option than ULIP. While I am no fan of ULIP, both ULIP and SIP combo have their own pros & cons.

 

 

Fixed Income policies are usually Reversionary Bonus policies. These policies provide appreciation (over invested amount) by annual bonuses declared by the insurer. The bonus rates are not guaranteed, hence the maturity amount may be different from the projected amount, just as in case of PPF.

 

Some reversionary bonus policies have fixed bonus rate throughout the term. These are Guaranteed Addition policies and the bonus rates do not change here. Thus, in these policies actual maturity receivable and the projected amounts are similar.

 

If you wish to create wealth by investing in fixed income linked instruments or fixed income instruments and simultaneously wish to have insurance cover, reversionary bonus or guaranteed addition policies are a good option.

 

 

Reversionary Bonus policies or Guaranteed Addition policies are many but mostly they can be categorized in the following four types.

  • Whole Life: Whole Life policies do not have any fixed term. These policies mature on the death of the policyholder, hence maturity amounts are always paid to the beneficiary. Whole Life policies have higher bonus rates, offer better returns as compared to other life insurance policies and are preferred option for estate creation.
  • Endowment Policies: Endowment policies always have a fixed term. These policies mature on expiry of the term period or on death/disability whichever is earlier. Premia are paid for the entire term or for a term lesser than the policy period. These policies help you create wealth by investing in fixed income instruments and simultaneously provide life insurance cover. Most life insurance brands in India are endowment.
  • Money Back Policies: Money Back policies are like endowment policies but pay the maturity in installments. These installments could be in equal intervals spread over the term or in the last few years. Some money back policies offer slightly lower bonus rates as compared to pure endowment policies. If you wish to create wealth by investing in fixed income instruments but prefer limited liquidity along with life insurance cover, consider the money back variety.
  • Pension Policies: Pension policies do not provide one time maturity instead offer lifelong pension. These policies have two distinct phases. The accumulation phase is where you contribute to the plan and create a corpus. On vesting you receive a lifelong pension from the corpus at a rate usually declared on vesting. Most pension plans are in the reversionary bonus category, hence the corpus amount cannot be predicted while buying the plan. Pension amount declared on vesting remains constant for the life of the pension holder. Some pension plan variants are now available in the Guaranteed Addition.

Apart from the above-mentioned categories, many life insurance brands are a mix of more than one category. Jeevan Anand a popular brand name is a combination of whole life & endowment. The trending brand Jeevan Umang of LIC is a combination of whole life and money back.

 

Some investment experts opine that fixed income linked or guaranteed addition policies are bad for your financial health. According to them since insurance and investments are separate subjects, you are best served purchasing a combination of Term Insurance and SIP in Equity Mutual Funds.

 

I agree with their assertion that insurance and investments are not same and strongly feel if you wish to buy life insurance, Term Insurance is probably the best option.

 

 

However, it may not be incredibly wise comparing a fixed income instrument with a market linked instrument (Equity Mutual Fund), just as it is improper comparing a recurring deposit (with your bank) and investing in the equity share of the same bank. The two are different asset-classes, have different potential returns and associated risks. If your risk appetite permits 100% allocation to equities for your long-term goals, go ahead and invest in SIP combo. If, however you wish to allocate some part of your long-term goals to fixed income instruments, the fixed-return policies are a good option. However, in this case the fixed-income policies should be considered an investment scheme (with life insurance cover) and evaluated accordingly. Expected returns from these policies should be in accordance with fixed income rates in the economy.

 

Before selecting your preferred insurance policy, it may be a good idea to decide on your preferred insurer(s) too. While selecting your preferred insurer(s), you might consider Claim Settlement Ratio, Financial Stability, Previous Bonus track record and Govt Guarantee too. Along with Claim Settlement ratio the amount of claims settled is also an important data. The regular IRDA, does a good job at screening the insurers, but if you believe the list is not of equals, you might decide your preferred ones ahead of choosing the policy.

 

Life Insurance policies can be bought either directly from the insurer or through their intermediaries. Intermediaries include brokers, corporate agents and individual agents too. You can buy these policies online and offline both. Online purchase is often slightly cheaper though some insurers may offer limited policies online. Equally online brokers may not offer all insurers on their portals.

 

Disclaimer:

  1. This article attempts to list few basic facts which will empower readers to understand sales presentations better and also filter through barrage of freely available resources. This should not be constructed as comprehensive buying guide.
  2. I am a Life Insurance agent myself.
  3. The views expressed are my personal views only.