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Module III: The Right Approach To Insurance Planning

Now that you may have understood why you should not club your insurance and investment Needs (discussed in our previous session), welcome to our next session...

Session 8: Simple Tips To Follow While Buying Life Insurance

Life insurance in its purest sense refers to indemnifying risk to life, whereby you protect the financial wellbeing of your family/dependents once you pass away. This is why having an adequate insurance cover is most important! So, you shouldn't buy an insurance cover arbitrarily.

As we explained in our previous session of the insurance planning module, don't make a mistake of combining your insurance and investments needs. Deal with each separately! Don't fall for the luring sale pitch of insurance agents; ensure you adopt a prudent approach.

So, first let's have a look at...

Simple Tips To Follow While Buying Life Insurance

1. Prudently assess your insurance needs - Adopt a scientific approach based on the 'Human Life Value (HLV) - expense method'. This will help you arrive at a realistic figure - you can use PersonalFN's HLV calculator for that.

2. Buy only pure term insurance policy - As explained in the previous session of this module, they offer a better cost-to-benefit ratio to address your insurance needs, hence providing for the financial security of your loved ones when you die.

3. Avoid adding riders if you do not fully understand them - Brokers/advisors will ask you to add riders. It may be a good advice. But without riders too, you can adequately insure yourself, provided you've determined your insurance needs scientifically. Remember, riders are not free; they cost you an additional insurance premium. Here are a few popular insurance-cum-investment products.

4. Compare policies to make an informed thoughtful choice - There are around 24 life insurance companies operating in India and an array of life insurance policies to choose from. As mentioned before, make sure you consider only pure term insurance plans to indemnify risk to life. Go online and compare insurance policies for the features (benefit) to the premium. You have an option to buy offline or offline. But remember, online term insurance policies are much cheaper and convenient to buy. If you are buying through an agent (i.e. offline), make sure he is in the business for a long time, where services and quality of advice are practiced with uncompromised integrity. After all, you don't want your family undergo the financial pain and the rigmarole later, by the agent's unavailability, at any point in the future.

5. Disclose all material information to the insurer - Concealing material information from the insurer can lead to the claim being rejected later, adding to the financial grief for your family /dependents. So, totally avoid providing incomplete or false information to the insurer. If you are smoker or indulge in a few drinks, reveal that vide the insurance proposal form. The financial wellbeing of family/dependents at least would not be jeopardised by doling a few hundreds or thousands more for premiums.

6. Know the exclusions; ask the right questions - All insurance policies will have some exceptions. These are circumstances under which the insurer will not pay you. Read the product brochure carefully -- know the product inside out. Make a list of questions and discuss these with the agent or the insurance company before signing on the dotted line. If required, take advice from a trusted fee based financial planner or financial guardian who will put your interest to the fore and clear your doubts.

7. Buy when you are young - The cost of an insurance policy increases as you grow older. So, it's always better to buy the appropriate life insurance policy when you are young. Therefore buy your life insurance policy at an early age and lock in the lower premium for the future.

Besides, even...

Check the broader aspects of the insurer...

• Promoter's Background - Knowing the history / background of the insurer is of utmost importance to recognise the value system. It would provide the needed comfort and ensures peace of mind.

• Number of years of existence - Well, it is always said that experience counts, and in our opinion too, it does! It would be prudent to go with season players (insurers) rather than the ones who are relatively new entrants in the business of insurance. However, do consider any new entrant, on the basis of merits.
• Financial Background - Just having a fantastic value system and good number of years of existence is not enough. The financial strength to back it is also imperative when it comes to settling claims. What is required is a robust financial muscle, which will lead to better claim satisfaction. So look at parameters such as...



1. Claims Settlement Ratio (CSR) - CSR will help you assess the percentage of claims settled , against the total claims lodged with the insurer. While doing this study, also know the claim settlement procedure, from your insurer or the insurance agents, and assess whether you are comfortable with it.



2. Solvency Ratio - This ratio reveals the strength of the balance sheet of the insurance company and therefore, affirms its capability to settle insurance claims. It takes into account the net worth as well as the reserves and surplus held by the insurer.



3. Profitability Ratio - This ratio reveals whether the insurance company generates enough income for its stakeholders after meeting all the expenses (both operating as well as non-operating expenses). While profitability may not appear as important as the claim settlement and solvency ratio, it needs to be gauged to ensure the efficiency and effectiveness with which the insurance company is run. Remember, only when the business is profitable, the promoters will find prudence in continuing with it.



• Always read the devil in the fine print - Merely trusting what the insurance agent or friends or family say and signing the dotted line (an insurance form) will not do you much good in the long run. It is imperative that you read all the relevant insurance documents carefully, rather than dumping them in some corner of your house or office. Remember, the devil is in the fine print. Hence, read all the terms and conditions attached to the policy.

Finally, here are a few...

Points to Remember

• Never buy an insurance cover arbitrarily. Determine your insurance needs vide a scientific approach - the HLV - expense method.

• Prefer only a pure term insurance policy, over insurance-cum-investment plans.

• Know the exclusions of the insurance policy. Make sure to read all documents carefully before signing on the dotted line. The devil is in the fine print.

• Don't take the risk to conceal material information from the insurer. It could cost your family /dependent their financial wellbeing.

• Compare life insurance policies prudently while zeroing down on one.

• Buy a life insurance policy when you're young.

• Besides, check for a few broader aspects viz. Promoters' background; Number of years of existence; and Financial background.

• If need be, seek advice from a financial planner or financial guardian who can guide you, keeping your interest at the fore and maintaining high fiduciary standards.

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