The importance of life insurance is undeniable in our lives. The death of the breadwinner can create havoc emotionally and financially. Life insurance is the solution to avoid a financial crisis for the family. However, buying the right life insurance plan is not easy. The first step is to know what NOT to buy. This is because insurers aggressively sell investment-cum-insurance products like Unit-linked Insurance Plans (ULIPs), endowment plans, moneyback plans etc. You don’t need these.
These are essentially investment plans. And poor ones. Most of the plans will end up giving you a 4% return. One plan we reviewed would give a return of just 2%. Some of them are so toxic that you will end up with nothing. Read this case that got Allahabad High Court so worked up.
The worst part is that a majority of customers who buy ULIPs or traditional plans remain under-insured, since a part of their premium goes into investments. The premium earmarked for protection is too low to be useful in a crisis. To get proper protection, their premiums would have to be much higher. Some policyholders who have traditional policies taken more than 20 years ago have a sum assured of Rs1 lakh—which is meaningless given the current inflation rate.
What you need is pure risk cover, which is offered only by term plans. These plans are not for investment and hence you do not get anything back. But Moneylife argues that the best investment vehicles are equity mutual funds or good quality stocks held for the long term. Not insurance plans that give you 4%.
Unfortunately, most life insurance companies are not interested in selling you term plans. They want to manage your money and so they aggressively push investment plans. Have you ever seen life insurance companies advertising term plans or agents pushing them? A random interaction with an insurance agent will reveal that term life plans are not even offered or discussed in most cases. Even when customers ask for them, agents are vague, which is their way of dissuading customers. Why is this so?
First, low premium income for insurance companies translates into low commissions for agents. Second, Indian customers generally view premium as a ‘waste of money’ because they naturally hope that nothing untoward will happen to them. For the premium they pay, they want something back from the insurance company. Term plans carry low premium for insurance companies, low commissions for agents and don’t pay anything to insurers. All this has ensured that term plans are the best-kept secret of the insurance world.
Life insurance is a way to provide for your dependents in case of your untimely death. It’s a method of transferring your financial responsibility to someone else (the insurer) when you are no longer around. This protection comes at a cost—the premium. If you live a long and healthy life, count your blessings and forget the money that you paid as premium. Term life insurance is the purest and best form of risk protection.
Indian insurance buyers do not understand this and in their search for a return on their premiums the intermediaries sell them ‘term return of premium’ (TROP) plans, wherein the total amount of premiums paid over the years, is returned at the end of the policy term. But TROP is just another form of investment-cum-insurance which you should avoid.
If you do decide to buy term plans, you should buy online term plans. An offline term plan is two to three times more expensive than online term plans. The next question is, which online term plans you should consider buying?
Each person is unique and hence, we cannot go by a ‘one-size-fits-all’ solution. Here are some of the questions one needs to deal with while buying online term plans.
Are you a smoker? What is your health condition? Are you comfortable with online purchases? Is online term plan offered for your city? For how many years do you need life insurance? How much insurance do you want? Will your policy mature when you are in your 50s, because buying a new term plan at that age may become an issue? What is the educational background of your family? Will they be able to save the lump-sum paid as death benefit? Do you want an online term plan without medical tests? Are you interested in product riders? Do you want to pay a single premium or go for a periodic, regular premium? Are you worried about the claims repudiation ratio of insurers? All these questions, and their answers, lead to different product options.
Premium members of Moneylife Smart Savers get the benefit of our deep research into all these issues and a shortlist of such plans.
Remember, life insurance is a way to provide for your dependents in case of your untimely death. Term life is the purest and best form of risk protection. Within that sub-set of life insurance, online term plans are the best option.