Understanding Life Insurance

Insurance is a subject matter of solicitation’, which essentially means that insurance has to be requested or asked for, not sold.

This phrase, which is found in all insurance advertisements in India, was mandated by Insurance Regulatory and Development Authority (IRDA).

As a consumer, this disclaimer/warning is of utmost importance but often ignored. Insurance should not be SOLD but Solicited.

“Ask, and it will be given to you; seek, and you will find; knock, and it will be opened to you.”

ASK YOURSELF…?

Do you have any life insurance plan? If yes, are you, aware what kind of plan it is?
Do you know, what life insurance plan and right amount of cover you require?
Did you buy a Life insurance Plan of an Obligation or by Choice?
Did you consult your family before buying Life Insurance Plan?
Do you, do right amount of research before you buy a product?
Have you ever had an experience an advisor selling you not the right product for your requirement?
Are you aware of the Term Insurance? Insurance means pure protection and protection cover means Term Insurance.
Are you aware of the commission of the agent or advisor mentioned in the illustration copy?

All the above questions are very important before buying any life insurance product.

Unskilled agents and advisors end up offering wrong products to their clients, with the greed to make more commission..? The same results in surrender or foreclosure of the policies impacting the buyer’s goals and aspiration.

The product like Life Insurance demand more human interface, but most insurance companies are driving more agent’s licences and not giving importance for learning and development for agents and advisors.

How Life Insurance Plans are sold today

Clients are told by their Insurance Agent or Advisor that…….

It is wise to withdraw money from your ULIP and park money in this new Guaranteed Plan.
Markets are volatile, I suggest, surrender your existing ULIP and go for any other plan.
This is the best product, offers you a guarantee of 11% returns. (They will even show you past performance. Past performance does not guarantee future returns.)
If you are not happy with the product close it in 15 days during freelook, get your money back. The awareness of 15 days freelook period is so high, there are high possibilities, in that advisors may even encourage the money laundering?
This is the only guaranteed product helps you beat inflation. (Traditional Endowment Plan)
With loans its mandatory you must take a policy. It’s one time, you don’t have to pay we will adjust against disbursement.

How Life Insurance Policies are sold today especially to illiterates ..?

Insurance Advisors or Agents provide incorrect information like

KISAN credit card comes with Insurance, they will sell insurance with KISAN Credit Card.
Your ULIP offers you flexibility like bank for withdrawal anytime.
Government Guarantee on Traditional Products.
9% – 10% Guarantee / Best return compared to Fixed Deposit on Traditional Plans.
Mutual Funds is not Guaranteed but Insurance Plan offers Guarantee.
You can take as much loan with this Traditional Plan.
Surrender your Traditional Plan when you need and take all your money with interest.
For Child Education they offer Money Back Plan.
In some case’s the Insured was a child and the beneficiary were parent.
They will compare Mutual Funds with Life Insurance, it’s like Apple to Orange Comparison.

Please don’t get carried away with such type of information

Below questions are equally important while applying for any Life Insurance,

Has anyone guided you through the importance of Risk Profiler before offering a Unit Link Plan (ULIP)?
Were you assured of Guarantee returns on a ULIP?
Do you understand Term Insurance is different from an Endowment Plan or a Money Back Plan?
Do you think a person can be educated within the time limit of 15 minutes to understand Life Insurance?
Approximately what is the duration with an Advisor or an Insurance Agent, before you did sign a Life Insurance contract in the scale of 1 – 60 minutes?
How would you rate your advisor in the scale 1-10 on his/her competency and value for your time?

Types of Life Insurance

Term Plan :

A term insurance policy is a pure life cover and its structure is very simple to understand. You pay a premium to an insurance company for a specific number of years and in return, in case you were to meet with an untimely death, the insurer promises to pay the sum assured to your family. It does not come with any maturity benefit (Other term plans come with Return of Premium or TROP).

Benefits of Term Insurance Plan:

It provides higher cover for lesser premium as compared to other life insurance products.

Term Plan with return of premium (TROP) comes with a maturity benefit, which is the sum total of all premiums paid.

It comes with riders like Accidental death Benefit Rider, Disability Rider, Waiver of premium, Critical Illness and Terminal illness.

Whole Life Insurance Policy:

As the name suggests, a whole life insurance policy gives you a cover for life. If the premium amount is paid regularly, the insurer promises to pay the sum assured to the nominee of the policyholder after the death of the policyholder. Apart from the sum assured, it also includes a saving component.

Benefits of Whole Life Insurance Policy:

Unlike other insurance policies, it does not have a defined term. The sum assured is paid to the dependent upon the death of the policyholder.

Apart from the sum assured upon your death, it also has a saving component. You can re-invest it letting the cash amount grow or can remit a part of the cash value during your lifetime. You can also avail a loan against the saving component.

Endowment Policies:

Endowment plans are again a combination of savings and protection. If the premiums are paid on schedule for a specific number of years, insurers promise to pay the assured sum to the nominee in case of the untimely death of the policyholder. Meanwhile, if the policyholder survives the policy term, he/she receives a lump sum payout as the maturity benefit.

Benefit of Endowment Policies:

Apart from the sum assured there is a saving component. You can use this to make goal-based savings and in case of financial emergencies, you can avail of a loan against it.

Moneyback policy:

Moneyback policies are also a combination of savings and protection. But the key advantage of this policy is that a portion of the sum assured is paid to you at a regular interval during the policy tenure. The remaining amount along with the bonus is paid at maturity. This benefit is not available for any other life insurance policy. However, if the policyholder dies during the policy tenure then the entire sum assured is paid to the nominee, this is despite the survival benefits that the policyholder has already received.

Benefit of moneyback policies:

The biggest advantage of moneyback policies is the liquidity it provides, i.e. you receive a percentage of the sum assured at the regular interval.

Unit Linked Insurance Plans (ULIPs):

Unit linked insurance plan, better known as ULIP, is a combination of insurance and investment. The investments are made in debt and equities by a fund manager assigned by the insurance provider. However, the policyholders can choose whether he/she wants to invest in debt or equity and in what proportion. Though there are no guaranteed returns, a lump sum amount is paid to the policyholder at maturity. However, if he/she dies during the policy tenure, the insurer pays him/her a sum assured or the Fund Value, whichever is higher.

Benefit of ULIP:

Though there is no guaranteed return, ULIP provides a higher return than traditional policies with a savings component.

Multiple Switches are allowed to transfer from one fund to another without any tax liability.

Bottomline:

Term plan is a pure life cover that focuses on offering your dependents the sum assured in case you were to die. Hence, it is a must-have for every earning member of a family.

However, if you are planning to buy a second life insurance policy, try to assess what you need it for. And once you know the purpose, evaluate all the policies to understand which one will give you maximum benefit. Your decision to buy life insurance should be determined by three factors – requirement, the benefits you get from the policy, and your ability to pay the premium.