Insurance has always been confusing but thanks to technology, it has at least become transparent off-late. Users can easily compare plans on the internet before buying one. This eliminates mis-selling and the policy buyer is more empowered to make a better decision. While, readily available information is good, it can also be confusing. Sheer overload of advice can overwhelm many, so before going searching for an insurance, ask yourself these questions and then go hunting for a plan that best suits your needs.
What is your goal vis-à-vis getting insurance?
Is it purely risk management? If the goal is just to provide a comfortable life for your family in the event of the untimely demise of the main breadwinner – a term plan will be best suited to this goal. Simply put, a term plan is the purest form of insurance which guarantees a pre-determined amount to the beneficiaries at the time of policy holder's death. But a term plan will not give any returns on the premium paid, or any money whatsoever if the policy holder lives beyond the term of the policy. A term plan is effective for a specific ‘term’ beyond which there is no cover or benefits for the policy holder or the nominee.
Do you want flexibility with your plan and generate some cash too from the premium paid, for later life in case of a long healthy life?
A ULIP provides the dual benefit of insurance and investment with flexibility. A ULIP plan tries to bring its buyers the best of both worlds, but comes with higher premiums. ULIP plan is for a value seeker who wants a bang for his buck while being insured at all time. Unit-linked policy plans or ULIPs allocate part of the premium paid for investing in funds (debt, equity, money market etc.). These plans provide flexibility to determine the amount of investment, switching between the types of investment and even withdrawing funds is so deemed fit by the policy holder. A ULIP investor can also alter the amount of coverage as and when he or she pleases. All of these conditions might vary in different ULIP plans offered so readers are advised to do their own research before selecting a plan.
Do you have time to manage relatively complex investment-cum-insurance ULIP plans?
As someone who opts for flexibility in managing their ULIP plan must be prepared to do their due diligence for effective and profitable managment of the plan. It is to be noted that a ULIP plan will be highly susceptible to capital markets’ performance, which swing between gains and losses frequently and thereby meant for those who have a relatively higher risk appetite. This plan is ideally suited for those who plan to stay invested in for a long term as capital markets are known to give good positive return over a long period of time.
Are you prepared to shell out higher premium for investment caveat?
The premium paid for a term plan is lowest among all insurance policies. This is because a term plan is a no-frills policy and won’t let the insured person tinker with the policy in any way. A ULIP plan, on the other hand, involves higher administrative charges such as fund allocation charges, fund management charges, policy administration charges and the cost of providing insurance cover. It is to be remembered that investment cum insurance is a cocktail which is handled better by the insurance industry rather than the policy seeker. Pure investment and pure risk protection are best administered separately. Basics of finance and investing say investments should not be done through insurance products, but through mutual funds, equities, etc. An investment-cum-insurance plan will give far lesser returns as compared to a pure investment plan.
What is your age?
Insurance seekers who are young, ideally in the age bracket of 25-40 should opt for ULIPs. It is assumed that younger people have higher risk appetite. People beyond 40 years of age seek security since their working years are lesser as compared to younger people. An elder person should go for a term plan given that it provides pure risk protection and and very low premiums.