Financial products are sold- not bought, and insurance products stand first in this category. This is because people trust the recommendations of the commission- based sales force and forget to analyse their individual needs.
Making an insurance decision generally involves two steps: the first one is to understand our requirements based on our unique situations; the second one is to identify the right insurance product that corresponds to our needs. The role of an insurance expert should be to aid you in the selection of the appropriate insurance product. Apart from this, getting acquainted with the basics of these insurance products complements our decision making process.
Understand your unique needs:
Human needs vary according to situations and from individual to individual. Therefore, a careful situational analysis is indispensable. Remember, many factors like individual’s age, occupation, financial background, annual salary, family size, planned retirement age and employment benefits have to be considered in detail.
Understand the products:
When it comes to choosing the right insurance policy, the first step is to decide whether to opt for a pure insurance product or insurance cum investment product.
Pure Insurance Products:
Term life insurance falls under pure insurance products. Term insurances provide cover against the risk of death during a definite term ranging from 10-30 years. The death benefit is the face value against the premiums are paid over the entire term and the beneficiary of the insured gets this benefits in the event of the policy holder’s death within the term. The policy expires at the end of the term and the beneficiary is not entitled to the death benefit after the expiry date.
Insurance cum Investment Products:
Endowment insurance plans, money back insurance and unit linked insurance plans comes under insurance cum investment products. In case of the endowment plans, the insured pays the premium throughout the term, and the assured sum along with the accumulated bonus is paid at the end of the maturity period if the insured survives. The bonus declared every year is not paid immediately, but paid only at the end of the term-the bonus is not compounded every year but accumulated. On the death of the insured, the nominee gets the sum assured plus bonus for the period up to which the premiums have been paid.
Instead of the bonus component, there are variants under this category called unit linked endowment plans that allow a part of the premium to be invested in government bonds or equities. The insurance policies that allow structured investments are generally called unit linked insurance plans, and they are subject to the vagaries of the market forces.
Next in line is the money back scheme which guarantees periodic payments to the insured during the lifetime of the policy plus the assured sum on the death or the maturity of the policy.
Then we have the whole life insurance policy that is not restricted by any specified term, but the policyholder continues to pay the premium until his death.
Match, solicit and select:
It is like looking for a needle in a haystack when the insurance market is flooded with plethora of schemes strewn around by a number of reputed brands. But it is not very difficult to choose when our unique requirements are crystal clear to us.
Planning your insurance needs involves the following four steps:
- Understand your unique requirements, and always bear in mind that insurance policies are not optimum investment vehicles-keep them separate.
- Instead of endowment plans, a wise combination of a term plan and periodic investment in public provident fund is always a better combination. Meanwhile, remember that the premiums for a term plan are cheaper than endowment plans and money back insurance policies.
- If your priority is to have a periodic flow of income after retirement, endowment plan with an option to convert the accrued sum into annuities is a good idea.
- Plan your insurance needs based on your current stage in your life because needs and priorities change during various stages in an individual’s lifetime. For example, a career beginner might have savings and protection as his priorities, but a person nearing his retirement might focus on annuities, liquidity and protection.
- Another factor into your requirements is your current and future income, inflation, liquidity and the instalments paid for your car loans, home loans and the educational loans of your children.
- Finally, remember that insurance is a subject matter of solicitation; therefore, educate your insurance sales agent about your unique needs, seek the necessary information, drill him with your questions and select the appropriate policy.
- An apt insurance policy is always tailored to the needs that are firmly anchored to our unique situations; therefore, always anchor your insurance decisions on your unique situations.
http://www.moneycontrol.com/news/life-insurance/tips-to-plan-your-life-insurance-needs_831761.html
