Life insurance is a term most of us are aware of. Be it the neighbourhood insurance agent, or the non-stop SMSes, there is a lot of communication about insurance that comes to us. As the financial year ends, many of us are approached to buy another insurance policy to save tax. But insurance, especially a life cover, is not for tax-saving alone. It has a more important purpose and relevance to our lives.
Insurance is a bond of trust. While many of you understand the purpose of insurance, there are challenges that you face after buying a policy. Mis-selling allegations fly thick and fast when the customer realizes that the life insurance product sold to him/her is not what they thought it was. This is why every policy buyer must ask 4 questions before they purchase life insurance. Read on to know.
Question 1: What is the amount of life cover in this insurance?
Life insurance is an umbrella term used for various kinds of policies. Hence, you must know that the life cover portion in all such insurance policies is not equal. If you are buying life insurance for protection, getting a big cover at the given premium is the topmost priority. If you meet with an unfortunate incident, the life insurance policy will act as a financial life jacket for your family or dear ones.
There are life insurance policies like endowment policy where there is a savings quotient. Moneyback or cash plans return a portion or nearly all of the premiums. There are term insurance plans that give you the cheapest cover and large coverage. Unlike a term insurance policy, whole life plans aim to give you lifelong protection. Plus, there are children’s policies and annuities. However, the most important thing to consider is the quantum of life insurance cover.
The right cover size is equal to all your future liabilities like family expenses, loans, children's education, and marriage and healthcare savings for spouse & parents. That is a finite number. If you are buying insurance for protection, it is critical that the cover be adequate.
Question 2: What is the return in the insurance cum investment policy?
There are unit-linked insurance plans, or ULIPs, that combine insurance with investment. Here, the focus of the policy is to give your market-linked returns. Insurance cover takes a back seat in such a product. There are many new-generation ULIP products that are extremely low cost and give you a wide variety of investment portfolios to choose from. Here, the returns will be linked to the underlying asset.
In money back and endowment policies, the internal rate of return in such products does not usually exceed 7-8% annually even after adding bonuses, loyalty/guaranteed additions etc. Knowing the ultimate return of any insurance policy is very important for you. The return is what defines an insurance cum investment policy.
In case you feel that this is too low, do not go for such a policy. Do remember those insurance policies that guarantee a fixed sum on maturity extract a high cost for giving you that guarantee.
Question 3: After how many years will I get my money and whether it will be lump sum?
One should know the exact time when you will get money in a life insurance policy. There are a few basics that you should keep in mind. Like, your family/nominee/legal heir will get the sum assured at the time of death. In other policies, the policyholder gets the maturity benefits. So, here you will live to see the policy mature.
It is also important to know how the life insurance money will come to you. At the time of maturity, will you will get the whole sum assured as a lump sum? Or, the money will come in tranches in sync with your future expenses?
The answer lies in the option chosen by you while taking the policy. You should figure out the answers. If you have opted for tranche wise payment, the money should reach you to cover your big expenses like your child’s marriage or higher education. In case the money comes after your death, ensure that the family members know how to safeguard it and use it properly.
Question 4: How much money will I get when surrendering the policy?
Surrender value is the amount which you will get if you voluntarily surrender your policy before its maturity. Surrendering can be due to a variety of reasons. Financial stress or distressing problems may cause some people to consider surrendering their policy.
Many also surrender policies to take out money from the policy if they have other pressing needs for the funds. While some types of insurance policies provide some surrender value, not all have the facility. Surrender value differs with every policy and with every life insurer. You must ask about the surrender value and base your decision of buying the policy accordingly. If someone has bought a term insurance policy, then surrender value does not exist unless it is a limited or single pay policy.
If you are a policyholder of a ULIP, then consider surrendering the policy only after completion of the five-year lock-in period. Similarly, one cannot surrender an endowment plan before the completion of the lock-in period.(The writer is CEO and Founder, Right Horizons)