How to take informed decision on life insurance policy?

As you start earning, you will get your first salary. You must be thinking what is to be done with the first salary. Here your financial planning start. Congratulation! On your first step towards your financial journey. People generally save the money from their first salary, as they are not much aware of what to do with the money. They seek guidance from their parents, friends, colleagues etc. You must opt for a life insurance policy for your self to protect yourself and your family.

As a novice in the financial world, I would suggest you save around 30% of your salary as an emergency fund. The second most important step you need to take is to get insured. Though you need to understand the in and out of the insurance and decide how much you actually need for yourself. The thumb rule for life insurance is to get 10 years worth of your current income.

For example, if your yearly income is 5 lakhs, then you need to get yourself insured for nothing less than Rs. 50 lakhs.  For taking this insurance, you must go for term insurance plans as per your needs and suitability.

Here is the list of best term insurance plans available in India.

In a simple term, insurance is the arrangement by the government or private company to compensate your survivors in case of your death for a payment of fees(premium).

There are many products available in the market by various companies which offer different plans with different benefits. The insurance market is so hard to understand even for highly educated people like engineers and MBAs. That’s the reason these insurance companies are minting huge money by selling your death and scaring your family. Never the less, insurance is a must have a product to protect the family in case of any undesirable event occurs.

Nowadays, most of the agents who sell you a plan is not an insurance plan. They are selling these plans as they are earning a higher commission on that product. Never mix insurance and investment. Your money will not grow by taking insurance clubbed with an investment plan.

Always go for pure insurance plan rather than a mix of product. Take an adequate amount of insurance as mentioned above in this post (10 times of your annual earning). The amount of insurance will vary case to case as it depends on the number of family members, assets, other income et. But you should go minimum for 10 years earning to start with.

Insurance is all about risk cover and protection against any unwanted life event. In India, the majority of the population doesn’t know how much insurance they need to have, or are they have enough insurance? They only know the premium they are paying year on year, but don’t know how much their family will get if the claim has to be made.

IRDAI’s role

Ironically, the insurance industry only measures the amount of premium collected from the people instead of how much its customers are insured for. All the metrics of insurance industry depends on only 2 parameters.

  • Premium collected
  • Claim settlement ratio

Try to find out the industry figure for how much insurance claims are delivered against the premium collected. You will not find the answer to this question. This is the main reason I am writing this post to spread the awareness about the insurance product. IRDAI should compare the disbursement amount v/s. premium collected from the customers.

IRDAI, who is supposed to protect your interest, doesn’t measure these important metrics for you. They only collect the information about how much premium collected from the people and doesn’t tell you the numbers for how much insurance is delivered. You will not find the numbers for premium collected v/s. claims delivered.

The thumb rule for buying insurance is to buy pure insurance product and keep investment separate and buy only term insurance. In India, most of the insurance company is clubbing investment with insurance as they think that potential customer will not buy pure insurance plan as he will not get anything in returns if the undesirable life event doesn’t occur. So they are pitching a clubbed plan to show you some amount of return on their investment(premium). Second major reason for selling a clubbed product is an agent is getting a higher commission on such product to compare to a vanilla term insurance plan.

So it’s up to you to choose your insurance plan carefully and don’t get fooled.

Avoid these traps.

  • Thinking your policy will cover all the events.

I have seen many people became victims of not paid attention to the fine print of the insurance policy. The policy sellers are generally from the social circle whom we trust. So without going into the details of the plan we blindly buy the policy. The main reason for claim rejection is that does not match the features of the policy or its simply not included in the policy. This can have a devastating effect. You should always check the features, benefits, and exclusions. Take an informed decision while selecting the insurance plan. Double check the features and exclusion on your policy.

  • Choose the first quote you receive

Many people are making this by simply choosing the first quote they received. As I mentioned above that the seller is from the social circle, we tend to rely more on him and skip checking other similar option available in the market. We sometimes feel we are doing a charity to the known person by giving a business to the person in need.

Always compare more than one quote so that you can get a more competitive deal.

  • Inadequate insurance amount

Some people are taking insurance of the lower amount than they should actually take. This is basically to avoid the premium cost and future liability of the payment. This could adversely affect the family in case of death event of the insurer. Less amount will leave your family in financial trouble as the coverage you have taken is not sufficient to cover the necessary financial commitments. Don’t make this mistake ever, consult your financial advisor and discuss your personal needs, debts and future commitments.

  • Clubbing insurance and investment

Don’t club insurance with investment ever. This will cost you both the side, you will not get the sufficient coverage and on the other side, your investment will not yield you good returns. Let me ask you a question: do you own a car? If yes, you must be paying a premium every year on your car insurance. You will get nothing back in case of no claim for the year. If this is the case, why not for your life and security of your family? Is your life is less worthy than your car?

  • Not reviewing your policy from time to time

Insurance is not a one-time activity that you purchase and leave for entire life. You need to review it time to time as your life event changes you need to check and update your policy details. For example, you got married so you should update your spouse name in the policy as a nominee. Missing on this will cost you huge in the future.

  • Going blindly and uninformed

Confess that we don’t have much of a knowledge about insurance. We tend to go by someone’s words and buy a plan we hope will be the right one for us. This can be a costly mistake, speak to your advisor if you are uncertain about what you need and what is the most suitable plan for you.

Follow below steps to avoid getting trapped

  • Know what you want to be covered for
  • Get multiple quotes
  • Always check the features, benefits and extra options
  • Price sometimes equates to quality
  • Stick to your budget
  • Don’t sacrifice your level of cover for better premiums
  • Don’t forget to know about the exclusions on your policy
  • Always review your existing policies and keep it current

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