Insurance is a necessity today and with the array of products available to the investors, it is not easy to choose the right one. This is especially true for Life Insurance products. Life Insurance includes term life and non-term life plans. While term life plans cover only the risk of an eventuality, non-term life plans aim to cover risks and provide returns at the same time. Let’s look at the latter first.
The Indian investor community is such that the majority of them still look to have the best of both worlds i.e. safety from risk coupled with sufficient capital appreciation without really understanding that the two cannot be achieved at the same time to its fullest benefit. However, there are certain products that try to achieve a balance between the two aspects (safety from risk and capital appreciation) like the non-term life insurance policies.
Now, there are various types of such policies, most notable ones being the Endowment Policy, the Money Back Policy and the Unit Linked Insurance Policy(ULIP). Each has its own unique structure and characteristics. But they all involve returning a certain corpus to the investor over a period of time, while also providing life insurance cover. Here are various parameters one can consider while evaluating any one of these policies:
Internal Rate of Return (IRR)
Especially for Endowment and Money Back policies, the IRR is the correct method of estimating the expected rate of return since it considers not only the total premiums paid and the expected future value of the corpus but also the tenure of premium payments and of the policy itself. For a ULIP, it is critical to study the historical Net Asset Value (NAV) performance of the fund(s) that the policy is investing into. Such information can be found on their website or in the public domain.
All participating policies have a bonus component to them. A participating policy is that policy that pays out dividends to the investor from the profits of the company. As such, bonuses are never guaranteed. There are various types of bonuses provided depending on the policy. Simple Revisionary Bonuses, Maturity Bonuses, Final (Additional) Bonuses are examples of some bonuses commonly heard of.
Charges that are levied by the insurance policy are usually the game changers in deciding if the policy is a good choice or not. Especially while evaluating ULIPs. ULIPs have several charges that while upfront in the policy brochure/document, are not always openly declared to the investor. The charges are always deducted from the premium thereby resulting in lowering the amount that is invested. Typically, a ULIP is subjected to mortality charges, fund management charge, administration charges, premium allocation charges and switching and surrender charges. Such charges eat into the principal invested from each premium thereby hampering the performance of the policy.
Option to Surrender
At any point, if the investor wishes to discontinue the policy, he may choose to do so. The implications of such a decision depend on the policy that is being surrendered. For example, in a ULIP policy, you are allowed to surrender the policy and receive the complete fund value only after completion of five years of the policy. If you choose to surrender the policy before the completion of five years, certain discontinuation charges will be applied and the net value will be transferred to the Discontinued Policy (DP) fund, where the fund will grow at a nominal rate till the completion of 5 years.
Flexibility in terms of premium paying term and/or options to switch is a good indicator of the worthiness of a policy. Furthermore, options on partial withdrawals, premium redirection option, top up of sum assured are also other factors that can be looked at when deciding on the policy. Each policy would have its own set of terms and therefore should be compared with other plans based on the requirement of the investor.
While an Endowment and Money Back policy could be considered a proxy for a fixed income product, the ULIP is much more varied, depending on the type of securities it invests into. While choosing a policy for yourself it’s important to understand your requirements in terms of expectations and risk appetite while also considering the factors mentioned above.
When it comes to term life covers, you will need to keep the following points in mind.
Premium to cover ratio
This is one of the most important aspects if you are looking to save some tax. The tax rules state that your premium should not exceed 10% of your sum assured if you want to eligible for benefits under Section 80C of the Income Tax Act. Ensure that your premium doesn’t exceed 10% of your cover. If your cover is Rs. 1,00,000, your premium should not exceed Rs. 10,000. This rule is also to ensure that insurers don’t charge exorbitant premiums.
You must calculate how much cover is adequate for you based on your financial needs and lifestyle. There are many methods used for calculating the cover that you need. One of these methods is the income multiplier method. This method says that you should have a cover that is at least 10 times your annual income. Let’s assume your annual income is Rs 12 lakh. In this case, you should get an insurance cover of at least Rs 1.2 crore. Monthly premiums for such covers now start at Rs 500.
Claim settlement ratio
The main purpose of getting an insurance policy is to protect your loved ones from financial hassles. What if it is a hassle for them to get that claim? That is why you need to check the insurer’s claim settlement ratio. The higher the ratio the better it is. This ratio gives you the number of claims settled against the number of claims filed. Ideally, the ratio should be more than 90%. You must understand that the ratio might be less for new insurance firms because they tend to get a number of false claims and have no option but to reject them. Claim settlement ratio is more relevant for established insurers.
As you might know, riders are added benefits that come along with your policy. These give you better benefits than a policy that comes with no riders. For example, the monthly income rider provides monthly income to the insured person’s nominees for a fixed period of time. This is apart from the sum assured that is provided. Riders come at a very low cost when compared to top-up plans.
Ease of availing the policy
Some insurers also allow to make monthly premium payments rather than paying a lump sum every year. Another point to note is how easy it is going to be to renew that policy. Ask your insurer what options you have. Some insurers allow you to renew the policy online. This can turn out to be very convenient.
You must compare across insurers in terms of premiums and policy features before choosing an insurance policy. This will give you an idea about the benefits that the policy has to offer and whether the premium is worth paying.