5 Questions To Ask Your Life Insurance Advisor Before You Buy

If only we had a rupee for every time someone bought a Life Insurance policy without fully understanding its features, we'd surely be millionaires by now! The next time you decide to add to your Life Insurance portfolio, make sure you ask your Advisor these 5 questions before you sign above the dotted line.

Do I really need this insurance policy?
Has your Advisor evaluated the need for this particular policy in light of your existing policies? You might already be sufficiently covered - in which case you may be better off investing this money elsewhere. The best approach is to arrive at a "Human Life Value" for yourself, and build yourself up to that level of life cover. Be sure to check that your Advisor isn't just 'selling' you a policy blindly.

Dilshad Billimoria CFP, Director at Bengaluru based Dilzer Consultants believes that the role of an Insurance Advisor extends well beyond just 'selling' policies. "A true financial advisor, who works in the fiduciary capacity of the client, will do an analysis of the existing policies that a client brings as baggage and provide advice on how to proceed, by doing calculations of the cost benefit analysis of keeping, making the policy paid up or withdrawing the policy", she said.
In another scenario, you might just be part of the minority group of people who don't need Life Insurance at all. Say, in case you are a non-earning person whose dependents will not be impacted financially due to an unfortunate loss of life, you really don't need an insurance policy. Divert the money to higher yielding instruments instead.

What kind of policy is this - traditional, unit linked, or pure term?
Although no two policies look quite alike when you compare their brochures, they essentially will fall into one of the above categories once you look closely enough. You'd be surprised to know that most people buy life insurance without even knowing what kind of policy they are buying! Knowing might just influence your decision to buy the policy or not, so please ask your Advisor this question. Traditional policies tend to be safer, with a lower return. Unit linked policies tend to be higher risk (depending upon the fund mix chosen) and have lots of associated charges. Term plans give you nothing back in the end, but offer you the best bang for your buck when it comes to upping your life cover. All three solve fundamentally different needs.

Billimoria is of the opinion that many clients end up buying policies for the wrong reasons, and hence do not take out the requisite time and efforts to understand them fully. "For example, 'my father's boss is an LIC agent and I'm obliged', or 'my father thinks insurance is the best investment for me for the future'. Or 'I did this insurance for tax savings under Sec 80 C or the LIC agent showed by a ULIP policy and told me my money will double in 3 years!' All these are baseless promises and the brunt of mis-selling falls on the client. He/ she has no clue as to how to proceed and so simply keeps paying the premiums", observes Billimoria.

What is the 'death benefit' associated with this policy?
This might sound like a no brainer, but remember that you're buying the policy primarily so that your family doesn't suffer financially in the event of your unfortunate death. Most Advisors will tend to avoid talking about the death benefit (when they're selling you a traditional plan or ULIP), as it's not exactly the brightest feature of that kind of policy! But if it's not solving the problem that it's meant to, why opt for it?

Billimoria agrees that the Death Benefit is the single most important criterion to be considered when considering the purchase of a Life Insurance policy. She says, "Death Benefit is the most important part of life insurance. It is the very purpose or objective of taking life insurance and the best way to cover oneself is through term plans where the cost to life cover benefit is the most economical and beneficial to the client."

How many premiums do I need to pay, and what happens if I stop paying my premiums?
Some policies require you to pay a single premium, some require you to pay 5, and some require you to pay 15. Some policies can be re-instated easily when they lapse after you stop paying, and some cannot. Just ensure you know the nuts and bolts of the one you're about to buy.

What is the likely "claim settlement ratio" for this insurer?
An important question if there ever was one! This essentially means - in case of your unfortunate death, what are the chances that the insurance company will actually pay up? 98%? Great! 67%? Reconsider your decision.

Billimoria is of the opinion that the 'percentage way' of calculation does not portray actually how many claims were rejected in absolute number terms. "For example, if the number of claims rejected in a year, are more; and the Claim Settlement ratio is high, it does not mean the company has a good claim settlement ratio, because the number of claims rejected are also high, with the base of more clients having joined", she says. Therefore, one should aim to look at the holistic picture, when evaluating the claim settlement ratio of a particular Life Insurance company.