CHOOSING the right insurance policy for family and for oneself has become crucial in the times of complicated financial markets and various other unexpected events.
It not only determines the concern that we get when our physical well-being takes a wrong turn, but is also very helpful for designing a well-structured financial plan.
All investors are very sure about all their investments especially related to fixed deposits, small saving schemes and others investments. But when it comes to insurance they are not very certain about their insurance needs and what kind of insurance they will be requiring.
When to buy an insurance policy? To choose an insurance policy directly depends on the applicant's age, profile of dependants, family expenditure, current earnings and tax benefits.
The different types of covers on offer are:
Pure term insurance: Pure term life insurance offers insurance cover for life for certain period of time. However, the cover offers no maturity advantages but on the demise of the assured in the specified term, the total amount insured is completely given to the kin.
These are the cheapest insurance covers available as they cover only the risk of death and have no investment component attached to them.
Endowment Policy: A life insurance agreement structured to be paid the total amount after a certain maturity period or on the event of the assured demise is known as an endowment policy.
The policy offers financial safety for a specified tenure. The purchaser pays premiums for a specific tenure and continues to stay protected for that particular tenure.
If the policyholder stays alive till the conclusion of the tenure, he is entitled to receive the fund balance.
Unit linked insurance plan: Ulip is also a product, which is a combination of insurance and investment. The only thing being, the investment component is as per the investor's wish unlike an endowment or a money-back plan, where the company decides where to invest.
Money-back policy: Money-back policy is the alteration of endowment plan. The basic difference lies in the maturity advantages that are paid by the company at the end of specific tenures while the life cover continues for the entire term.
Tips for choosing an insurance policy: While selecting the right insurance cover, one should always consider his present earnings and the estimated competence to pay the insurance premiums at the allotted dates besides the age factor, future financial strategies and medical condition.
If it is a Ulip then one needs to compare and consider the charges of similar plans offered by various insurance companies.
Hence we need to consider the policy's cost-benefit ratio.
The cost benefit ratio of the policy relies on many factors such as what is insured, what's the cost paid to avail the investment facility and what are the benefits that come along with it.
One way to quantify the cost-benefit ratio is to calculate the internal rate of return (IRR) one earns from the policy. IRR basically is calculated on the basis of cash outflows (premiums paid) and cash inflows (maturity amount or an annuity).
More the IRR, the better the policy.
The best way to demystify the returns from any insurance policy apart from a term plan is to first compare the premium with the term insurance rates. Then deduct the proportionate amount, that is, the equivalent term insurance rate from the total premium paid. The rest is your investment component.
Calculate the IRR on this net premium. For traditional plans, like endowment or money back plans this rate might come to about 8 per cent on an average.
For Ulips the returns will depend on the asset class chosen by you. But these are just the gross returns. Your actual returns decrease because of mortality charges and various other charges. As per the track record, the traditional plans have given an average net IRR of hardly 6 per cent.
Insurance by itself is not an investment and if you consider it as the only investment, you are seriously losing a lot of money, especially to inflation.
Happy Investing!!
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