HOW TO BUY THE RIGHT LIFE INSURANCE
First
calculate how much cover you need. Then go online to buy a term plan that
offers high cover at low cost.
How much is your life worth? It’s a morbid
question, but one that must be answered when you go shopping for life
insurance. The foremost objective of life insurance is to provide financial
support to your family and dependants if something untoward happens to you.
The cover should be big enough to settle all outstanding dues as well as
generate an income for the family of the insured person. Use the worksheets
given below to know how much insurance you need. We reckon that for the
average ET Wealth reader, the answer would be anywhere between 75 lakh and
1.5 crore. This is not an overestimation, but the bare minimum your family
will need to maintain the current lifestyle.
Adequate life cover won’t cost the earth if you buy
the right type of policy. Traditional plans offer a smaller cover because
they are esstially investment vehicles. At the age of 30-35, a person will
be required to pay a premium of almost 8-10 lakh a year for a cover of 1
crore. Only the super rich will be able to afford such a plan. For the
average buyer, a better option is a pure protection term plan which can
offer the same cover for 10,600-12,600 a year (see chart).
The term of the policy is equally important. A
cover that ends when you are in your 50s won’t be of much help when you
would need it most. Buying a new plan at that age is very costly. Take a
plan that extends till the end of your working life.
In the past 2-3 years, almost all private insurance
companies have launched online term plans. They are easy to understand,
convenient and far cheaper than the offline versions that require an
intermediary.
The premiums of online term plans are so incredibly
low that some people fear there is a catch. There is no reason to doubt the
policy, as long as you have honestly submitted correct information. Don’t
deny if you use tobacco, consume alcohol or are employed in a hazardous
industry. Also, if you or any blood relative has suffered from an illness,
disclose details of the ailment. These are material facts that impact your
risk profile. The claim can be rejected if these aren’t disclosed at the
time of application.
Agents try and paint a different picture because
they lose business when a customer buys directly from the company. But
online customers receive the same quality of service from the insurance
company as any other client. When a claim is processed, there is no
differentiation between a policy bought online and one purchased through an
agent. Besides, all insurance companies have to comply with the rules laid
down by the insurance regulator, Irda.
Buying a policy online also means you have to be
alert when it comes up for renewal. With no agent involved, nobody will
badger you to pay future premiums. The grace period of some plans is also
very short (15 days). You can avoid missing the premium by automating the
payment. Give an ECS mandate to your bank to pay the premium. You just need
to ensure that there is sufficient balance in your account when the payment
is due.
A pure protection term plan should form the base of
your insurance portfolio. Once that is in place, you can consider buying a
Ulip or a traditional plan. You can invest in stocks through a Ulip, but
they are costlier than mutual funds and have a longer lock-in period.
Traditional plans are debt based but offer low returns of 6-6.5%. These are
suited to high-net worth individuals for whom the tax benefits offered on
life insurance policies are an important concern.
ETW131209
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