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Needless to say, there are a large number of them out there —victims of mis-selling of insurance products by unscrupulous agents or officials at distributor banks. The Insurance Regulatory and Development Authority (Irda), on its part, has brought in several regulations to curb the menace of mis-selling.
The insurance watchdog has come up with a draft standard proposal form for life insurance policies. This is in addition to the proposed guidelines on need-based selling released in January this year. The form, if enforced in the current format from September 1, will require the agents to list out various personal and professional details of the insurance-seekers' life before recommending them a suitable life insurance policy.
The latest move comes as a welcome relief for policy holders since the form would try to capture and relay to the insurance company the exact need and position of the prospective policyholder and thus reduce to certain extent mis-selling that was rampant till sometime ago. The form provides for a need-based assessment of the individual in terms of: reason for seeking insurance, monthly inflows and outflows, ability to save and the reason for choosing the product.
However, you don't have to pass on the entire responsibilities to Irda and insurance companies. Since it is your money and precious time that would be wasted if there is a problem with the insurance product, you can keep a few pointers in mind to ensure that you don't fall prey to the outlandish sales pitches.
Always remember that life insurance is always bought to replace your income and secure your dependents financially in your absence. Therefore, no matter what your agent or bank may say, focus on protection rather than investment.
This apart, you need to take into account your risk appetite, which also happens to be a key parameter to be considered by agents as per the new proposal form while recommending a policy.
Life Stage
If your career has just taken off and you do not have dependents or an education loan, you may not need life insurance at all. In such a case, a health insurance should suffice. Or you can add a personal accident policy. You may look at increasing this cover or buying investment-cum-insurance policies, which insurance advisors will typically suggest then, as you get married and plan a family.
However, don't forget to evaluate other investment options, like mutual funds, before buying such plans. Senior citizens looking at investing their retirement funds could consider staying away from life insurance altogether and look for safer avenues like senior citizens' savings scheme, fixed deposits or well-performing debt mutual funds.
Income And Expenditure
The new standard proposal form also moots detailing the insurance-seeker's current as well as projected income and expenditure – over a period of up to 30 years. You can roughly estimate your future expenses to help you make the right purchase. Include your living expenses, in addition to the present value of education, health and travel expenses. While estimating future expenses, you need to incorporate living expenses as well as the cost of any aspirational goals for your children or other imperative goals.
Assets And Liabilities
Instead of simply giving in to agents' persuasion to buy a high-value policy, compute the exact amount of life cover you need. The requirement for a person's insurance cover is dependent on the wealth available for the dependants in case of the life assured's demise visà -vis the present value of future expenses of the family.
To compute this figure, you need to subtract the value of your liabilities from that of assets, except your residence since it cannot generate income. To this figure, add the present value of the expected income of your spouse (if earning) till retirement to obtain the present worth of the kitty available for your dependants. The difference between the present value of future expenses (as computed earlier) and the available corpus will represent your insurance requirement.
This calculation will provide a more accurate picture than the thumb rule that prescribes a life cover of 100 times the monthly income.
Plan Retirement Carefully
Some life insurance products – traditional as well as unit-linked pension plans – are aggressively sold as ideal retirement-planning tools. These are a strict 'no-no' for senior citizens as they need immediate access to regular income. Others should assess non-insurance products like equity mutual funds and public provident fund, too, before taking a call. Charges, returns, taxability and exit barriers should be the main determinants.
Our chief apprehension about pension plans is that they are not tax-efficient, as the annuities are taxable. Besides, most traditional pension products offer returns in the region of 5-6%. That is why we are not gung-ho about pension products from life insurers.
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