Are you sure you have the right insurance policy?

Life insurance is a contract between the insured and the insurance company wherein, on death of the insured, the insurance company agrees to pay an agreed sum of money to the nominees of the insured.

Most people buy insurance policies for investments and tax-saving purposes. Very few actually buy insurance for the sake of protection. In India, as the penetration of insurance is very less, insurance companies aggressively market their products through new products and services. Sometimes, this also leads to mis-selling of the product, ultimately affecting the insured.

How will you know if you have chosen the right policy? If you want to buy insurance to protect your family, then you should opt for term insurance and not an endowment plan.

The premiums in term insurance products are much lower than in endowment because in term, if your policy is for 25 years, then you pay premiums for that entire tenure and only in case of the insured’s death will the sum assured be paid to his family. Whereas, in endowment, you get sum assured after the policy tenure gets over. As no financial product can be bought for a trial run process, you need to be very careful when you buy the same.
Here are a few pointers that will indicate whether you have the right insurance policy.

High premium: “The thumb rule says that one needs a cover of at least 10-12 times their annual income. The premium for this cover for a 30-year-old person should not account for more than 1-2% of his annual income,” says Bienu Vaghela, chief editor of apnapaisa.com. “For instance, a person realises his policy is wrong because the premium he is paying doesn’t give him the sufficient cover. In this case, one can get his policy paid-up and then simultaneously take a new policy that gives sufficient cover,” says Amar Pandit, CEO of My Financial Advisor.

If a person is paying Rs5,000 premium for a Rs20 lakh policy and he realises the cover is insufficient, then he can get the policy paid-up by not making any more premium payments and getting a less sum assured than what he was supposed to get. This paid-up process is different for every insurance company as the policy taken by every individual varies. If you are paying anything over and above this, it’s better you sit down with your financial planner and evaluate your policy. This doesn’t mean life insurance is always expensive or an expense. If your premium is high and doesn’t give you the sufficient cover it must in that premium, then obviously you’re paying too high for that cover.

Low cover: Just like every diet doesn’t suit everyone, financial products available in the market are designed differently for different people, depending on their needs and risk appetite. Hence, every individual must take insurance according to his needs. For instance, if you don’t have any dependants, or you are retired, or you have enough income (or assets) to back your life  then you don’t need to buy life insurance at all.

A policy should give you a life cover of at least 10-12 times the annual premium. And if it does not, then you are paying too much for the cover.

Period or tenure of the insurance policy: Insurance is usually taken to replace the family’s financial position after the death of the insured as the family was dependant on him and his income. Therefore, the cover should be such that it  covers his family for his entire working life. If the policy ends before he retires, it won’t be of much help when he needs it the most. Buying a fresh cover later will be costly.

Hence, buying insurance as soon as you start working is a must and make sure it lasts until you retire.

Return is not the motive of insurance: An endowment policy appears attractive because of the projected corpus on the maturity of the plan. But one must factor in inflation. “Many people get attracted toward this product as it offers money on the maturity of the product. But the return it gives is not attractive enough and also there is no flexibility to change from one insurer to other. Hence, a person should opt for a pure term plan which provides simple insurance with pure protection to his family on his death,” says Nikhil Naik, MD of Naik Wealth.