Deepa Gopalan
ET Intelligence Group

How do you choose the best insurance policy?

ALL of us, at some point or the other, have had a close encounter with insurance agents. And most of the agents try to tell us about lifestage planning and need-based planning with respect to life insurance. Most companies have developed products that are intended to suit you at every stage of your life.

There are endowment policies to help build up your investments, money back policies to give you regular returns, retirement solutions to help you save for life after retirement, children’s policies to save for your child’s future and a whole lot more. More the choices, more is the confusion in deciding what policy to opt for, for only a life cover. ‘Life cover’ is nothing but the main aim of insurance – to provide financial security to your family in case of your unfortunate death.

So more the choices, more is the confusion in deciding what policy to opt for, for only a life cover. You ask this question to an agent and he will tell you to take a policy that gives you a life cover plus an accident benefit rider plus an investment option plus periodic returns, leaving you wondering what you really needed.

If you are looking for a pure life cover policy — no frills attached — the answer is very simple: Term insurance policy. This policy is the largest selling policy in the world, simply because it is cheap and serves the basic purpose of covering your life. In this policy, one will have to choose a term for which one wants to buy the insurance cover and also the amount of life cover.

A premium would be charged according to the term chosen, amount of life cover and the age of the policyholder. Premium is the price you pay to buy the policy — an amount that is paid annually, semi-annually or quarterly to the insurance company throughout the term chosen. Now, if the policyholder dies during this term, his nominees would get the sum assured, that is amount of life cover.

On the flipside, if the policyholder survives the term of the policy, she does not receive anything at the end of the term. However, the policy is so cheap — one would ideally not mind shelling out that little bit for a life cover.

Moreover, some companies have a variant of this plan called a premium-back term plan. In this case, one will pay higher premiums, but at the end of the term, on survival, one would get back the premiums in full. So if you are not quite comfortable with the idea of paying a price without getting anything in return, you could as well opt for some such plan.

Having seen how this plan works, let us list down its benefits. Firstly, the policy is cheap. For a sum assured, that is, life cover of Rs 10 lakhs for a term of 20 years, a 30-year-old would pay a meagre annual premium of about Rs 3,000 to Rs 4,000 (see table for company-wise details).

Secondly, you get a tax benefit – the premium will be eligible for rebate under section 88 of the income tax act and the proceeds paid to the nominees on death of the policyholder would be exempt from tax under section 10 (10D). And as the premiums are so low, you might not be a big loser if you want to discontinue your policy by stopping the premium payments.

So in the case of, let’s say, Life Insurance Corporation’s (LIC) simple term policy, you will pay Rs 56,260 over 20 years. In case of your unfortunate death during the 20 years, your family will get Rs 10 lakhs. On survival till the end of the term, you will not get anything in return.

What are the points you should keep in mind before you buy the policy? Remember that the premiums that you pay are dependent on your age. So the younger you are, the cheaper your policy. So, try going in for this policy at an early age of say 25 to 30, and for a long term of 20 or 30 years. The later you take this policy, the more expensive it will be. Also remember that, as these policies are pure risk policies, there is no bonus element, that is, you will no get any share in the profits of the company.

So for a plain vanilla risk cover, term insurance is the best, simply because it’s cheap and gives you great value for money.