The Insurance Alphabet

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[<p>For most individuals, life insurance is the first step towards financial planning. However, many of us end up confusing life insurance products with investments products.<br><br><strong>Sanjiv Bajaj</strong>, managing director of Bajaj Capital and <strong>Balwant Jain</strong>, chief financial officer of Apnapaisa, a price and features comparison service for loans and insurance products, explain to Businessworld's <strong>Tanushree Pillai</strong> the different kinds of life insurance products available and the benefits and pitfalls of each. <br><br><strong>What are the kinds of life insurance products that are available for investors?</strong><br><strong>Bajaj:&nbsp; </strong>The life insurance market has evolved tremendously over the last ten years, as there is a wide range of life insurance products which are available for investors now. These include Child Plans, Endowments, Retirement Solutions, Ulips, Term Insurance Solutions and Monthly Income Plans.<br><br><strong>Jain:&nbsp;</strong> First of all, life insurance products should not at all be treated as investment products.<br>&nbsp;<br>One should always separate insurance and investment. Typically, these are the types of products in insurance sphere:<br><br>1) Term plan<br>2) Traditional Plans <br>3) ULIP plans <br><br><strong>How are all these plans different from each other?</strong><br><strong>Bajaj:&nbsp; </strong>The various life insurance products differ from each other on the basis of the risk appetite of the client, as to who can choose between unit linked (ULIP) versus non linked products. Also, based on the risk cover requirement, an investor can go for a low-cost term insurance solution or a mix of protection and investment through endowment solution. <br><br>Child insurance is unique in itself because it often offers a feature called Built in Waiver of premium benefit which assures that in the event case of any mishap with the parent, the child's investments are not frozen or stopped in between. Rather, the insurance company on behalf of the deceased parent would contribute the premium on the due date so that child's financial goals are achieved as it is.<br><br><strong>Jain: </strong>a) <strong>Term plan: </strong>These are pure insurance products where only the risk is covered. <br><br>These plans are available for a certain number of years (up to which the risk is covered).<br><br>There are variations of this as well. A pure term plan is where if the insured person dies during the period of insurance, his nominees get the insurance money. However, in case he survives the term for which the insurance policy is taken, then he does not get anything.<br><br>Then, there are ‘return of premium policies', where the premium paid is returned without any addition/bonus to that. There are single premium polices we well.<br><br>These pure terms plans are available both online and off line. Online term plans are cheaper by around 35 per cent as compared to off line plans bought through agents.<br><br>b) <strong>Traditional Plans: </strong>These are saving cum insurance plans and thus have higher premium. Historically they have given returns of around 5.5 per cent in the past. These consist of: <br><br>1. <strong>Whole life polices</strong> - money is payable after death of insured person. <br><br>2. <strong>Money back policies</strong> - you get your money back periodically.<br><br>3. <strong>Endowment plans like child plan </strong>- money is paid at the end of the term chosen by you<br><br>Then, there are <strong>ULIP plans </strong>which have higher component of saving and lower portion of insurance - it is long term product.<br><br><strong>What are the benefits and pitfalls of each of these products?</strong><br>&nbsp;<br><strong>Bajaj: </strong>Endowment is usually bought for a fixed tenure with the objective to receive a lump-sum on maturity to meet one of the financial goals. Being a traditional product, the investment is primarily debt based &amp; hence the investor can expect between 6-8 per cent return only. However, investors are assured of a minimum return called sum assured which is prefixed at the beginning of the policy.<br><br><strong>Ulips </strong>are very flexible investment cum protection solutions where the client has choice in the form of fund allocation, risk cover multiple &amp; transparency in investment returns. But being unit linked, there is no minimum assured return guarantee to the investor &amp; hence he needs to take his own decision on choosing the asset allocation to get the desired returns.<br><br><strong>Child Plans</strong>: There is no replacement for this kind of policy because of the features mentioned above which insures continuity of investment for a child even on demise of the parent. Child products can be bought either as unit link or through traditional versions.<br><br><strong>Term Insurance Solutions: </strong>Term Insurance is the basic form of life insurance bought with an objective to meet the risk cover requirement of an individual.<br><br>Broadly two types of Term Insurance Solutions are available: With Return of Premium and Without Return of Premium. Pure Term Insurance, which doesn't return anything on maturity, is the cheapest but by adding a little more, one can convert Pure Term into With Return of Premium Solution. The biggest advantage of With Return of Premium Term is that it offers the features like "No Lapse Guarantee" which means that in the situation of the client's inability to pay the premium, his risk cover would get proportionately reduced for the remaining term as against the lapse of a policy in case of the normal term plan.<br><br><strong>Monthly Income Plans (MIPs)</strong>: These are the latest and one of the most sort-after products in the life insurance space as they offer guaranteed regular income to the investor for a defined period after he has initially contributed for few years of premium. Since they offer a guaranteed, tax free income, they are ideal for retirement solution or buying a second income for professionals.<br><br><strong>Jain: </strong>Except pure term plan, we would not advise any other product as the returns are abysmally low. Advice to buy only term plan can be taken as rule from us - there are no exceptions to this rule.<br><br><strong>What should an investor look for before buying a life insurance product?</strong><br><strong>Bajaj:&nbsp; </strong>Before buying a life insurance policy, one should contact a financial advisor to help him ascertain his protection needs and investment needs like child education and retirement. Based on this, he should choose between the various type of products mentioned above and also choose the product based upon his risk taking appetite i.e a unit link versus guarantee based traditional plans.<br><br><strong>Jain:&nbsp; </strong>First of all a person should buy an insurance only and only if someone else is dependent on him for financial support. Hence, a student or housewife should not buy any life insurance. <br><br>However, health insurance for them is a must and one should buy health insurance for all the members of the family irrespective of the age of financial dependency.<br><br><strong>What should an investor be wary of before buying life insurance?</strong><br><strong>Bajaj: </strong>Discipline of staying invested is the key to any life insurance product. Hence an investor should completely satisfy himself as to the requirements and once he has committed to the product, he should stick to the commitment for the full term.<br><br><strong>Jain:&nbsp; </strong>One should get his insurance needs assessed by a professional based on his present living standard, present age, the age at which one wants to retire, number of dependents, life expectancy level. We suggest a person should get his insurance needs assessed through a Certified Financial Planner - one should be adequately insured, neither less nor more.<br><br>One should buy his insurance term so as to co-terminate with his retirement age. Once a person retires and stops earning he does not have to have any insurance as financial dependency of the family comes to an end.<br><br><strong>What are the common mistakes that investors make while buying life insurance?</strong><br><strong>Bajaj: </strong>The biggest mistake one does while buying a life insurance product is that he buys from the tax saving perspective whereas it is the incidental benefit and should not be the only base in forming a decision. One has to align his financial goals with the life insurance product he is buying. Worldwide majority of the long term savings are primarily done through the life insurance route.<br><br><strong>Jain:&nbsp;</strong> Not disclosing material facts while filling up the insurance proposal form. Normally the insurance agent proposes and fills in the proposal form.<br><br>One should fill in all the details himself in the insurance proposal form. <br><br>One should disclose the facts correctly and honestly. Even a small mis-statement on your part can jeopardize the claim in the eventuality of the death of insured.<br><br>One should not mix insurance and investment at all.<br><br>If one does not understand investment, there are very simple products like PPF and post office small saving products which combined with term plan will give you better returns any day.<br><br></p>