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5 things to keep in mind while buying life insurance

Always keep the policy document in a prominent place and tell your family about the policy.

June 20, 2017 / 01:53 PM IST

Shalabh Saxena

Traditional ego & pure ignorance prevent a typical Indian from sharing financial information with the family. This pattern is uniform be it cash investments or real estate or something as important as a life insurance policy purchased. What then happens in a case of an unfortunate occurrence is the family goes through the hassle of sorting out the paperwork(s) and in some cases these investments go undetected.

Here are five things you should keep in mind while buying a life insurance policy:

Inform your family and near ones that you have bought a policy

Always keep the policy document in a prominent place and tell your family about the policy. Life insurance being one of the most important investments for financial security should be handled with utmost care. The very purpose of taking a life insurance policy is to safe-guard the family financially & hence the first thing that one should do is to inform the family (spouse, children & close family) about the purchase. This applies to all financial savings be it investment in gold, fixed deposits, loan (lending’s /borrowings) or cash holdings.

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Ideally, one should maintain a small diary or note (digitally in home computer if possible) and write each of the above listings. Most importantly inform the family about it (in case of digital, keep reference of passwords). Specific to life Insurance, do record the policy number, insurance amount, date of maturity, type of policy and beneficiary name etc. This would prevent the family from going through the trouble of documentation or plain miss outs & would help them claim their rightful money without delays.

Never opt for low sum assured

What is the value of human life? Taking life insurance policy is not obligatory, but a duty. Never buy insurance under obligation as inadvertently you will end up discounting that value. In one of our claim experiences, we have seen a case where the wife (nominee) questioned us as to why did we not convince her spouse to take higher insurance since what was taken was not enough (Rs 3 lakh in the case) to meet her requirement either ways. This leads us to answer the question of how does one calculate the human value.

In simple terms human life value can be defined as the life time earning potential of an individual. Every earning adult, including house wife, has a human value. For example, If Kumar is 30-year-old and earning 5 lakh per annum and planning to retire at 60, then a simple calculation of Kumar's human life value is Rs 1.5 crore (5 Lakh X 30 years to retire). For this, we have assumed no increments and inflation in future. If we add those, human life value of Kumar will be more than Rs 4 crore. In such a case, it is only appropriate that Kumar takes a policy that is commensurate with the income that he earns so that his family is able to maintain their lifestyle in case of an unforeseen happening. As a reader, you too need to think about it. Hence it is very critical that you calculate your human value & then make a calculated decision on the insurance amount when you purchase a life insurance policy.

Do not buy without researching enough (over internet, physical approach)

'Caveat Emptor' or "Buyer Beware" is something that applies to all purchase decisions including life insurance. Simply put, you should be aware of what you are buying. If you need life insurance (which everyone does) one should know the type of policy, level of insurance, duration etc.

To be aware of the intricacies of these elements, there are many tools (Need Calculators) and literature available (both online & offline) to guide you appropriately. This is your right hence please exercise it diligently. While researching, please keep following points in mind.

a) Human Life Value - Your value
b) Purpose of insurance (Protection of standard of living, education/marriage of children, retirement or managing wealth)
c) Product type - Pure term plan, traditional plan, unit linked plan, and group credit protection plans etc.
d) Affordability - How much premium is affordable / monthly or annual premiums etc.
e) Claim ratio and experience
f) Ease of Policy servicing

g) Performance of funds - CAGR for ULIPs and annual bonuses for traditional plans

An exhaustive research leading to a well thought out outcome is a job well done, hence please do take note.

Identify your need first and then buy a solution

We involve our family in buying things as trivial as household articles or mobile phones. But, when it comes to buying something as important as "life insurance", we leave it to the agent or an intermediary. Buying life insurance is one of the most important decisions of life and should involve your entire family in this decision making. It is the most important tool for financial security and hence it is imperative that they are a part of the decision making process.

However even before that, you should first identify the specific "need".

Generally, life insurance needs are classified into 4 categories.
1) Protection of standard of living for the family
2) Providing for child's education / marriage
3) Planning for your own retirement

4) Plan for smooth hand over of your legacy to the next generation

For each of the need, there is a specific solution which the range of life insurance products offer. It is hence critical that you first identify the need and then look for the most appropriate solution. As already detailed earlier, do not compromise on the solution, go at length to ensure that it gives you a comprehensive coverage of the need.

Also, one of the most important things is "periodic reviews" of your need & the corresponding solutions. Your life insurance policies need to be reviewed every year and additional coverage may have to be bought depending on your needs. This is the most critical element and one should keep this as top priority.

Do not lapse your policy ever. This is your primary security.

'Lapse', 'discontinuance', 'surrender' are not the right words and are best avoidable if you have a life Insurance policy. This happens when you stop paying your premiums or decide to exit the policy even before the policy duration.

Let us understand one thing. 'Life insurance is not a "right" but a "privilege". It is a privilege because of one's good health (insurable health), one's net worth (insurable interest) and one's trustworthiness (utmost good faith) gets you a policy from an insurer. Simply by discontinuing or lapsing it, you are losing the "privilege".

By lapsing, you are depriving your family of their basic right of living. After lapsing, you may not be in good health to take a new policy or your policy might be declined on health grounds. All these are avoidable scenarios and will ultimately lead to your family being deprived of these benefits in case you were not around.

Life insurance is not a "disposable instrument" which you could liquidate for a need (from the one that you had identified while purchasing). Hence hold on to the policy without compromising on the objective for which it was bought. In case there is a financial exigency, there are facilities available like partial withdrawal or loans against policies which can be availed.

Hence to summarize, identify your need, buy a policy after thorough research and then pay premiums on time to ensure benefits are availed to the fullest. Never, I repeat, never discontinue a policy as that would be compromising on your family's financial future.

(The writer is COO at Canara HSBC Oriental Bank of Commerce Life Insurance Company)
first published: Jun 20, 2017 01:49 pm
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