It is very difficult to assess and select right life insurance plan, particularly when you have 23 Life Insurance Cos. selling more than 500 plans in the market. The lack of knowledge and expertise in this field can definitely lead to misselling or wrong buying and can spoil entire financial plan of an individual. The agents also do not give proper advice to the clients and run always behind commissions. It is more important before buying a life insurance plan that one should know how much insurance cover you require, for protecting your family in case of unfortunate event. People also do not consult professionals like financial planners for the exact requirement of life insurance and to select the best plan available in the market. The true professional, instead of selling product to the customer, will charge fees for the service provided by him. But fact is that people also do not want to pay the charges and mostly depend on the advice given by their agent. Now what is the best solution available to us?
Before coming to the conclusion, you should know and be aware of the features of the insurance plan. Neither Agent explains the plan in details to the customer nor client gives their valuable time to assess the plan. First we should try to learn the same. There are basically three types of insurance plans available in the market, Traditional or Conventional Plans, Unit Linked Insurance Plans and Term Insurance Plans.
Traditional plans are mostly saving products and gives guarantee of sum assured and also gives bonus every year depending on the profitability of the co. The investment options are with the insurer and they take a call where to invest the premium collected from the policyholders. These plans invest 85% in government and corporate bonds i.e. in debts and 15% in equity. Endowment Plan, Money Back Plan and whole life plan come under this category. Now insurers have also launched combination of two of the above plans, but the basic feature remains the same. The draw back of these plans is that, they are neither flexible nor will give good returns in the longer run. You should not expect more than 5% return in these plans. There is long-term commitment for payment of premium and in case of emergency if you need money, you have to take loan on your money and have to pay interest on it, which is higher than the bonus credited to your account every year. The plans are like a one way, once you enter in it, it is very difficult for you to come out of it.
Unit Linked Insurance Plans popularly know as ULIP came mostly after the privatisation of Insurance industry. Private players launched ULIP to capture the market share, as it was difficult for them to beat the LIC in traditional plans, particularly in bonus rates. ULIP plans are market related and risk of investment is born by the policyholders. Policyholders have the right to choose the investment option available in the plan i.e. from 100 % debt to 100% equity. ULIP products are more complex than Traditional plans and it is difficult for a common investor to understand the impact of different charges on his investments. The major charges levied in ULIP Plans are Allocation Charges, Mortality Charges, Policy Administrative Charges, Surrender Charges and Fund Management Charges. The most important part is that ULIP should match with your both insurance and investment need. Recently insurers withdrew more than 200 plans and launched only 40 plans after recent IRDA guidelines effective from 01.09.2010. These plans may have to change after the Direct Tax Code is passed in the parliament, as one of the clauses of DTC clearly says that your premium should not be more than 5% of the sum assured. You may be aware that DTC is likely to be implemented w.e.f. 01.04.2012.
The last but most important insurance plans is term insurance plan, Term insurance is the oldest form of insurance and is the least expensive plan to purchase the death benefit. It is a no return plan just like your mediclaim or car insurance cover. If claim comes with in the insured period, the nominee will get the full sum assured or otherwise there is no maturity value or cash value of the plan. Term Insurance provides coverage for a specific period or term say 10,15,20, 25 years. Term insurance is the simple type of life insurance and easiest to understand. You need not have to calculate the charges and returns in this plan, as you know from the day one that premium paid by you is not going to come back. My advice to all is that please do not take this as an expense but treat this as must for the protection and security of your loved ones. You need to compare the premiums before selecting the right co. and also have to go through the exclusions in the plan. This will help you in selecting the right plan.
Most of the people think that there are no insurance charges in traditional plans or they ignore as the sum assured is coming back to them with bonus. The reality is, nothing is free. All types of plans have the cost of the insurance, added before arriving at the exact premium to be charged to customers. ULIP also charges insurance cost every year, by canceling your units in the fund value. So you buy any product, cost of insurance i.e. mortality charges will be there, either in built or separately charged.
Direct Tax Code, 2010 provides for the deduction of only Rs. 50,000 for life insurance premium compared to 1 lakh available today, and the same is also clubbed with health insurance & tuition fess paid for 2 children’s. Thus, you are left with very low amount available for deduction for life insurance.
Looking at all the facts available, term insurance is the obvious choice for life insurance.
This article first appeared at myiris.com on 10th Oct. 2010
