Which life insurance policy you should be buying right now?

Saji George

In India there are 24 life Insurance companies who offer over a thousand products across categories like Term life, Endowment, Money back, Child Plan, ULIP, and Annuities to name a few. These products come with all kind of options and riders. You can buy some online and for some you need to go through an agent/broker. A common man, if he has to make sense out of all this needs to know 3 things:

• How much do I need?• For how long should I have insurance?• How to buy it?

Two Financial risks in life

For a moment let us forget about insurance companies, their sales pitch and various products they offer with their myriad options. Instead focus on yourself. Assuming that you are gainfully employed, you and your family face two fundamental risks in life:

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• Dying too young• Living too long

The first one leaves your dependents and loved ones without the support of your income. The second leaves you with no money in your old age. Given that you cannot choose the time of your departure from this world, it is best that you think about mitigating the impacts of these two risks.

Term Life Insurance: Risk of dying too young

Let’s start with the risk of dying too young. If you are an earning member of your family and have family members who are dependent on your income, you want to ensure that your family continues to enjoy the same lifestyle even if your income is no longer available to them. This is where a term life Insurance comes in. A term life insurance pays the beneficiary of the policy an amount equal to the sum insured in event of the insured’s death. Typically the beneficiary would then put the money into some financial instrument (for example: savings deposit, FD etc.) that will give him/her a regular income. You want that income to be equal to your salary. The interest rate today is anywhere between 7% and 10%. This means that the amount you should insure yourself for is about 10-15 times your annual income. For example, if your annual income is 10 lacs, you should buy a term insurance policy of sum insured between Rs 1.0 and 1.5 crores. You can try an online calculator too.

The next question that comes to mind is how long should you insure yourself for? You should insure yourself up to the age of anticipated retirement. In India that means up to age 60 for most of us. For example, if you are 35, that means buying a term policy for a duration of 25 years (Retirement Age 60 – Current Age 35 = Policy Duration 25).

You can buy term insurance online or through an agent. The price of a product is fixed and does not depend on whom you purchase it from. Use a standard online comparison site to check for the rates.

Be sure to check the claims acceptance record of the insurer you buy from. A 90% or more claims acceptance record is good. What this means is that the insurer has a record of settling 9 out of 10 claims. Depending on the amount of insurance and your age, you may have to undergo a medical test. You will also need to submit documents proving your identity, place of residence and income along with a completed proposal form.

One of the main causes of claims rejection is that the insured has not been fully truthful in declaring all information on the proposal form. Be completely truthful and disclose everything fully.

Annuities: Risk of living too long

While the risk of dying too young is well understood, what is not so well understood is the financial risk of living too long. Life expectancy in India is just short of 70 years and most people will plan to have enough retirement savings a few years beyond that (say up to 75 years). What happens if you live well beyond that age; say into your nineties? A generation back the government was the main employer and people had defined pensions. That is not true anymore. With life expectancy on the rise, employers no longer providing guaranteed lifelong pension, and dependence on your children not necessarily a reliable (or palatable) option, one needs to start thinking about how to mitigate this risk. This is where annuities come in.

Annuities are the exact opposite of term life insurance. In order to buy an annuity you need to pay a lump sum amount. In return, the insurer promises to pay you a guaranteed monthly income until you or your spouse is alive. You should not put your entire retirement savings into an annuity. Put in enough so to cover your basic day to day spending. There are several insurers who provide annuities. Though the choice today is not large, I am sure it will increase over time. The time to think about annuities is when you have retired or are about to retire. Be careful about one thing: there are several products that are sold as annuities but will not pay out for your entire life. Avoid such products.

By now you are probably wondering why I have not said a word about Endowment, Child plans or ULIPs. The reason is simple. These products are a combination of protection and savings. Insurance products in general are not great at wealth enhancement. There are much better options elsewhere.

Buy insurance for what it is best for: protection from risks. No other financial product provides that.

Author is co-founder of policylitmus.com