What your insurance adviser won't tell you
Agents Will Hardsell Policies That Offer Them The Highest Commission, But A Simple Term Plan Is Your Best Option
Thomas is cursing himself. His new financial advisor has just told him that his three-year-old insurance policy would count among one of the dumbest things he has ever done in his life. The insurance plan didn't suit him and the insurance cover is also inadequate, the financial geek told him. He also asked Thomas to dump the plan, get whatever money he can from the insurance company, and then buy a new plan. Thomas couldn't understand what the fuss was all about. "I didn't think much before buying the policy. A friend suggested an agent, who came to the office and selected the plan for me. All I did was sign on the dotted line," he says.
According to his financial advisor, the practice of blindly signing on the dotted line is not uncommon when it comes to buying insurance. "Often I find that people have multiple insurance polices with small insurance covers. Since they count the number of polices they have instead of the total insurance cover, they don't know that they are severely underinsured," he says. "If something happens to them, their family won't be able to maintain the lifestyle with the insurance cover from these policies," adds the financial advisor.
According to him and other insurance advisors, all you need to know is the basic premise behind the idea of buying an insurance cover and rudimentary details of how various insurance products work to stay clear of the trap of buying wrong products.
How much cover should you buy?
Mostly insurance agents or advisors have the last say on the insurance cover. According to experts, the insurance cover is dictated by the choice of policies and premium amount than the need for adequate insurance cover. "Most insurance advisors sell a plan which gives them a good commission. Mostly these plans have a saving element along with life cover and they are generally expensive," says an insurance advisor with the Life Insurance Corporation of India (LIC). What a customer should do is to do some number crunching to find out how much cover s/he needs.
Mostly insurance agents or advisors have the last say on the insurance cover. According to experts, the insurance cover is dictated by the choice of policies and premium amount than the need for adequate insurance cover. "Most insurance advisors sell a plan which gives them a good commission. Mostly these plans have a saving element along with life cover and they are generally expensive," says an insurance advisor with the Life Insurance Corporation of India (LIC). What a customer should do is to do some number crunching to find out how much cover s/he needs.
The basic idea behind insurance is simple. If something happens to you, your family should be able to maintain the same lifestyle from the proceeds from the insurance policy. To make this happen, your family should get an amount which would generate enough income for sustenance. One way to find this out is to calculate how much of your salary is consumed by your family. For example, let us assume that your take home is Rs 20,000. Now deduct all your personal expenses, savings and investment from it to find out how much you spend on your family. Suppose the amount is Rs 10,000. Your insurance cover should be a ro u n d Rs 20 lakh to generate an annual income of Rs 1.2 lakh (we have assumed the interest rate at 6%).
They come in all hues
Now since you know your cover, it is time to take a look at different insurance products (their name would change with each company, but the basic principle would remain the same) your insurance agent is going to sell to you.
Unit Linked Insurance Plans:
Apart from the insurance cover, ULIP offers you different investment options with varying degree of risk.
Endowment plans:
These too have a saving element along with insurance cover. However, they don't offer you any investment options. Your insurance company would invest money in a conservative fashion.
Money back plans:
They also have a saving element in the premium and offer periodic payments at regular intervals.
Whole life plans:
As the name suggests, you have to pay the premium your whole life or up to your seventies.
Term Plans
You would be extremely fortunate if your insurance agent mentions these. They are the cheapest, pure insurance cover.
So which is the best?
According to financial geeks, you should ideally buy a term plan. Most of them don't approve of mixing investment and insurance, as they don't think much of the investment skills of insurance companies. (That rules our ULIPs, endowment and money back plans). You are better off investing money in a mutual fund. Also, ULIPs don't score much on transparency. They also don't favour whole life plans be cause you
to pay premium even after retirement. Finally, the best way is to keep it simple: for insurance needs, only look at term plans.
How much cover should you buy?
Mostly insurance agents or advisors have the last say on the insurance cover. According to experts, the insurance cover is dictated by the choice of policies and premium amount than the need for adequate insurance cover. "Most insurance advisors sell a plan which gives them a good commission. Mostly these plans have a saving element along with life cover and they are generally expensive," says an insurance advisor with the Life Insurance Corporation of India (LIC). What a customer should do is to do some number crunching to find out how much cover s/he needs.
Mostly insurance agents or advisors have the last say on the insurance cover. According to experts, the insurance cover is dictated by the choice of policies and premium amount than the need for adequate insurance cover. "Most insurance advisors sell a plan which gives them a good commission. Mostly these plans have a saving element along with life cover and they are generally expensive," says an insurance advisor with the Life Insurance Corporation of India (LIC). What a customer should do is to do some number crunching to find out how much cover s/he needs.
The basic idea behind insurance is simple. If something happens to you, your family should be able to maintain the same lifestyle from the proceeds from the insurance policy. To make this happen, your family should get an amount which would generate enough income for sustenance. One way to find this out is to calculate how much of your salary is consumed by your family. For example, let us assume that your take home is Rs 20,000. Now deduct all your personal expenses, savings and investment from it to find out how much you spend on your family. Suppose the amount is Rs 10,000. Your insurance cover should be a ro u n d Rs 20 lakh to generate an annual income of Rs 1.2 lakh (we have assumed the interest rate at 6%).
They come in all hues
Now since you know your cover, it is time to take a look at different insurance products (their name would change with each company, but the basic principle would remain the same) your insurance agent is going to sell to you.
Unit Linked Insurance Plans:
Apart from the insurance cover, ULIP offers you different investment options with varying degree of risk.
Endowment plans:
These too have a saving element along with insurance cover. However, they don't offer you any investment options. Your insurance company would invest money in a conservative fashion.
Money back plans:
They also have a saving element in the premium and offer periodic payments at regular intervals.
Whole life plans:
As the name suggests, you have to pay the premium your whole life or up to your seventies.
Term Plans
You would be extremely fortunate if your insurance agent mentions these. They are the cheapest, pure insurance cover.
So which is the best?
According to financial geeks, you should ideally buy a term plan. Most of them don't approve of mixing investment and insurance, as they don't think much of the investment skills of insurance companies. (That rules our ULIPs, endowment and money back plans). You are better off investing money in a mutual fund. Also, ULIPs don't score much on transparency. They also don't favour whole life plans be cause you
to pay premium even after retirement. Finally, the best way is to keep it simple: for insurance needs, only look at term plans.
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