Life Insurance

The presence of a life insurance policy is essential in every individual’s financial portfolio. For it is life insurance that provides financial security to the nominees in case of an eventuality. But with so many insurance companies vying for a position in the individual’s financial planning exercise, how do individuals go about evaluating the various insurance plans on offer? Here, we present a few guidelines on the various aspects which individuals should look at while assessing an insurance plan.

Term plan evaluation

A term plan is a pure risk cover plan where only administration expenses and mortality charges are covered in the premium. There is no savings element in the premium being charged to the insured; as a result the insured does not receive anything if he survives the entire term. Hence, it makes sense to opt for a term plan that has the lowest premium for a given set of parameters.Since premiums across life insurance companies differ, the individual should ask for a ‘quotation’ from the agents/advisors of all companies. This makes sense because although one company may be cheaper at a given point in time, it may not always be the case as the premium amounts differ over various tenures, ages and sum assured for individuals. An illustration will help in understanding this better.

How much does it cost?

  Age 25 Yrs Age 35 Yrs Age 45 Yrs
Company A Ltd Rs 2,424 Rs 3,747 Rs 7,797
Company B Ltd Rs 2,720 Rs 3,580 Rs 7,620

As the table shows, a term plan for an individual aged 25 years, for a sum assured of Rs 1,000,000 for a 20-yr tenure will cost him Rs 2,424 if he buys it from Company A Ltd; this is cheaper than the cost incurred on buying the same plan from Company B Ltd (i.e. Rs 2,720). But at age 35 and 45, other parameters remaining the same, the same plan works out to be cheaper if bought from Company B Ltd as opposed to Company A Ltd.

How to evaluate ULIPs

ULIPs are probably the most aggressively marketed financial product today. But individuals often buy ULIPs without understanding the intricacies of the product. ULIPs have to be evaluated on various aspects; annual expenses and fund management charges being a few such parameters.The lower the FMC and annual expenses, the higher will be the returns and vice-versa. Also, FMC plays an important role in judging ULIPs; because unlike the annual charges, which are levied on the premium, which remains the same throughout the tenure, FMC is levied on the corpus, which keeps fluctuating each year.

Fund management charges

A Ltd
B Ltd
C Ltd
1.50% 0.80% 1.75%
Balanced fund 1.00% 0.80% 1.40%
Debt fund 0.75% 0.80% 1.25%

Investors would also do well to enquire about the equity allocation in the ULIP options. This assumes importance when evaluated in conjunction with investors’ risk appetites. If say, an investor has a propensity to take above-average risk, then considering a ULIP which has an 80% cap on equity investments in say, their ‘Aggressive growth fund’ wouldn’t make much sense.Some other parameters for evaluating ULIPs include the reputation of a particular ULIPs’ fund management and how well the company’s ULIPs have performed over time. Also, evaluating ULIPs from across various insurance companies helps individuals in mitigating risks as well as holding a diversified portfolio. However, diversification shouldn’t be at the cost of fund management expertise or performance criteria.

Child Plans

While evaluating child plans, it is important for individuals to first define their child’s needs. If individuals feel that they would be best served by a money-back child plan, then they should opt for the same from a company that offers money-back child plans; conversely if they feel that an endowment child plan would be better, then they should look at such plans. They can also opt for children’s ULIPs as equities are best placed to accumulate wealth over the long term.

Pension / Retirement Plans

As for pension/retirement plans, some companies allow individuals to withdraw 1/3rd of the maturity amount while some others allow only upto 1/4th of the maturity amount. At a time when an individual probably needs money the most, any ‘extra amount’ will always be welcome.All in all, individuals need to bear in mind that buying insurance is not only about a particular life insurance company per se; one also has to look at the various options available from within the same product category and evaluate the ‘best fit’. Hence, it makes sense for individuals to take a look at insurance products from across various life insurance companies and hold a diversified insurance portfolio.

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