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3 questions to ask your insurance agent

LiveMint logoLiveMint 03-04-2017 deepti bhaskaran

A term plan is the best way to buy life insurance, but there are other life insurance plans that bundle investments, and hard sales push make these plans quite popular. While there is enough anecdotal evidence to suggest that these bundled products are prone to misselling, what about misbuying?

Often, these plans are bought because you get a tax benefit, and unlike a term plan that returns nothing at the end of the policy, bundled plans give you a maturity corpus. So, if you die, the beneficiary gets the insurance money, and if you survive, you get the money at the end of the policy term: a win-win for all. But ask these three questions to make sure you understand your policy and take the right decision.

What is the insurance cover? Remember you are in the market for insurance and so the first question you need to ask your agent is the insurance cover in the policy.

While most traditional plans will give a sum assured or death benefit that’s 10 times the annual premium for tax benefits—Rs1 lakh annual premium for Rs10 lakh of insurance cover—unit-linked insurance plans may offer a higher multiple, but a higher multiple may mean more costs and low returns.

“You need to take stock of your financial goals and cash flows and then match it with your assets and liabilities. The gap here is the amount of insurance that you need. So ask your agent the sum assured in the policy and the annual premium for that insurance cover and compare it with a term plan,” said Nikhil Vikamsey, partner, Alpha Capital. 

According to Priya Sunder, director PeakAlpha Investment Services Pvt. Ltd, life insurance should take care of routine expenses for the family if the breadwinner dies. “The policyholder needs to account for his annual expenses and depending on other factors like assets and liabilities, work out his insurance cover. On an average individuals should have an insurance cover of at least 14 times their annual expenses,” she said. Do the math for yourself and work out the premium for a bundled policy. Can you really afford it?

Where is the benefit illustration? The second most important factor, and the most difficult to gauge in an insurance policy, is costs. In a unit-linked insurance plan (Ulip), costs are mentioned upfront, but that is of little help if you can’t figure out how it impacts your investments. And in the case of traditional plans the costs are embedded.

What you need to ask your agent then is a benefit illustration that shows the money that you invest and value of that money at the end of each year assuming two rates of return of 4% and 8%.

In Ulips it’s mandatory to disclose the net yield on maturity but that doesn’t help much if the insurer leaves out the mortality cost from the calculation, which can be considerable for an older person or in case of a higher cover. Take the help of a financial calculator online or ask your financial adviser to help you calculate the net return. That will give you some sense of costs.

“You should also ask for the performance of the policy. Unless it’s a guaranteed policy, ask for historical rate of return,” said Pankaj Mathpal, certified financial planner and managing director, Optima Money Manager Pvt. Ltd. “In Ulips, see the performance and compare it against the benchmark. In traditional plans, compare it with other debt products like Public Provident Fund,” he added.

What does is the cost if exiting mid-way? Insurance policies are long-term products, but what happens if your policy didn’t turn out to be what you wanted? You need to be able to get out of the policy at minimum cost. You should, therefore, look at the exit load. You need to look at two things: cost structure and surrender charges. A front-loaded cost structure makes portability difficult as you would end up paying higher costs right in the beginning. Plus, very high surrender costs—like in the case of traditional plans—make exit difficult.

According to Sunder there is one more important question that you need to ask, not to the agent but yourself. Can I trust this agent? “Insurance is about your family and who they will have to deal with after your death. So make sure you can trust your agent. Beware of distributors who advise you to hide facts regarding your health while filling up the proposal form,” she added. Bundled insurance plans are complex products, so make sure you understand them well.

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