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The insurance sector is grappling with the problem of mis-selling of life insurance policies. And, even the Insurance Regulatory and Development Authority (Irda) has asked for advertisements that clearly say the regulator does not announce bonuses.
Potential buyers need to do their homework before buying any policy. It is always a tough job to choose the right one. What you need to do is be ready with a set of questions.
For example, the first question to ask the agent is – Why should I should buy this policy? This is an important question because it tells you the sales pitch. If it is about saving tax and you don’t have a policy already, there is a case for buying. But if you do have one or more, there is no need to add. And, if the seller peddles higher returns, especially as the market is doing well, it’s best to avoid the policy.
Another important question is the tenure. Says certified financial planner Pankaj Mathpal: “Typically, a life insurance policy should cover one till he retires. So, policies should have a term of at least 20-25 years. But many fixed tenure products are for 10 years or less. Avoid such policies.”
Next: What is the insurance company’s claim settlement ratio? This information is easily available on companies’ websites. This is the ratio of number of claims settled to the number of claims received by an insurer. The higher the ratio the better is the insurer’s service at the time of claim. LIC has the highest claim settlement ratio of 97.73 per cent, followed by ICICI Prudential Life and HDFC Standard Life.
“But you need to compare the claim settlement ratio against premiums. While LIC has the highest claim settlement ratio, it charges a higher premium, too. There are companies with good claim settlement ratios and lower premiums; one could opt for plans of these companies,” Mathpal adds. You could also check premiums of term plans online for even cheaper options.
Then, what are the charges? If it is a traditional or unit-linked insurance plan, the costs will be substantially higher than term plans. “Don’t go for savings plans (traditional or unit linked), especially if you are above 45-50 years of age, unless you are buying a pension plan. Reason: Charges like mortality fee will be very high and returns much lower,” explains Depak Yohannan of MyInsuranceClub.com.
Traditional plans have an opaque charge structure (even up to 30 per cent of the premium) and are more expensive than unit-linked ones – policy allocation fee (7-10 per cent in the initial years), policy administration fee (a percentage of the premium) and fund management charges (1.35 per cent a year). Unless you are lazy in terms of financial management and want to combine insurance with investment, it is best to avoid that.
Remember, if it is not a term plan and you want to discontinue it, there will be a higher surrender fee (for Ulips, it is 10-15 per cent in the initial years and lower after the fifth year) than that of traditional plans – 30 per cent in the second and third years and 70 per cent in the fourth year, excluding the first year premium. If you are looking for a long-term cheap life insurance plan, a term plan should be your choice.
