INSURANCE: You need term cover only till retirement

Life insurance products come in all shapes and sizes and that makes it critical for a layman in deciding which product to buy and how. There are certain important points that you need to understand before you buy life insurance.

It starts with the most basic, yet important question, that is, whether you need a life insurance cover. You do not need it if you are super rich or do not have dependents to be taken care in case of your death.

Once you are clear that you need a cover, you need to decide how much cover is sufficient. This is important because more often than not people end up buying many insurance policies, but still they don't have sufficient cover. People often ignore important facts while calculating their insurance need like their age and risk profile, their dependent's profile, outstanding loans and asset base, their monthly expenses and future financial goals. The minimum cover one should have is at least 10 to 15 times of their total income after excluding outstanding loans.

Next is to decide which product to buy. There are many categories of products available in the market, such as, endowment products, Unit Linked Insurance Plans, term plans, etc, and buying a wrong product will defeat the whole purpose. The traditional endowment plans can work for those who are risk-averse and happy with the fact that their capital is safe. While returns from endowment plans are low at 6-7%, they are assured. Then it also provides life cover.

The second set of plans are Ulips, which offer you the advantage of both market-linked returns and a life cover. Ulips are suitable for a financial savvy person who can understand markets.

Then there is term plan, which is the best plan to buy. Term plan offers a higher insurance coverage at low premium. In fact, you can buy a term plan for Rs 1 crore for as low as Rs 10,000 to 15,000 (in case you are less than 35 years of age). The premium for term plans is lower than any other insurance product across any age group.

After choosing the plan that is most apt for you, you have to decide which insurance company to buy it from and how. The parameters to consider are claim settlement ratio and overall health of the company. These can help you make a rational decision.

How you buy an insurance policy is also an aspect that requires careful consideration. If you buy it online, you can save the agent's commission. But now-a-days online premiums are either at par or slightly lesser than buying it through an agent. So, take a call based on factors such as whether the person advising you is merely an agent or a financial advisor too, and whether the price difference is significant. If you have an advisor who will be there to help your family in case of your death, then go with them. Else buying online is always best.

The next thing is the duration of your policy or for how long you want cover for yourself. In fact, an advertisement of an insurance company says it is providing cover till 100 years of age. Well, you don't need a cover till 100 years of your life, but only till the time you retire. Focus on creating wealth across asset class like gold, real estate, fixed deposits, stocks and mutual funds, which provide your dependents the real insurance cover than depending on any policies.

The writer is chief gardener, Money Plant Consultancy