Five questions to ask before you buy life insurance

Dave is not alone. This story probably has thousands across the country saying the same thing. It may be too late to salvage some polices, some you may be able to terminate at minimum loss, but the lesson for the future is in knowing what to buy. Ask yourself these five questions before you buy another life insurance policy.

1 Why am I buying life insurance?

Life insurance is a product that protects your dependants against your untimely death. But, life inurance in India has been sold as a vehicle for tax rebates and investment. Sort out your own reasons for buying a policy.

• Is it for a tax rebate?
Consider an alternate instrument that will give better returns than an insurance policy.

• Is it for investment?
Buying insurance for investment may have been a good strategy ten years ago when the investment vehicles in India were few, but not any longer. Look at options like the systematic investment plans of mutual funds or even a recurring deposit with the Post Office.

• Is it pure insurance that you want?
If you want pure insurance, buy a term policy that gives you maximum protection for every rupee of premium you pay.

2 What benefit will my survivors get if I die during the term of the policy?

Life insurance is bought so that your untimely death will not put your family on the street. A rough rule of thumb says that insuring yourself for an amount that is seven to ten times your annual income is a sound insurance strategy. Notice that as your retirement nest egg grows, the dependence on insurance needed to sustain the lives of your dependants goes down.

3 If I survive the policy what do I get, what is my return?

This is a question no insurance agent will like to answer. If you have a term policy, you get nothing, for term is like your car insurance, you pay every year and get nothing at the end of the term of the policy. But other polices – endowment and money-back – assure you a sum at the end of a certain number of years. Ask the agent to tell you how much return your annual premiums would give if you were to survive the policy. Then, work out if you still want insurance as an investment vehicle or would like to buy term and invest the rest in an alternative product that gives a higher return.

4 Should I buy term, whole life, endowment or money-back policy?

The answer to this depends on the reason for buying insurance. If you want pure insurance that has no investment component, go for term. A term policy is taken for a fixed number of years, there is no insurance cover or any money back after the term gets over. If you want to provide for your family in case of untimely death or want to use insurance as a means of estate transfer to your heirs, go for whole-life polices. Whole life polices protect you for your entire life, they have a term of 99 years. If you are looking at buying both insurance and investment, look at endowment polices. These have a defined amount that your family gets if you die within the time period of the policy. At the end of the policy period, you get the sum assured back. A money-back policy has a very small insurance component and gives a low return on investment.

5 Which company shall I buy from?

From just one company selling insurance, the market is today flooded with products and companies. With everybody pushing to sell, you need to step back and consider your own needs first. Talk to at least three companies. Look at their products, ask for detailed specifications on return, benefits and costs. Compare products across companies. Evaluate the kind of after-sales service you will get. It may be a good idea to call the helplines to see the response you get. Remember the regulator, Insurance Regulatory and Development Authority (IRDA), allows a 15 day ‘cool-off’ period within which you can return an unsuitable policy.

Life insurance is a long term monetary commitment. You will locked into paying a certain premium for the next 15 to 30 years. It makes sense to get a product that suits your needs, costs less and offers better service.