Life Insurance is a product which in India sold forcefully but not bought with proper planning. You receive plenty of calls from your neighbor, relative, friend or friend’s friend who turned out to be insurance agent. After few calls you buy that product without understanding the proper need.
So which is the best life insurance policy in India?
Is there any single product which we can say the best product and will be suitable to all buyers (not investors)? No…because each buyer’s need is different, hence we can’t say that a single product from any of XYZ insurance company will be best. Having said that, the next question is, why you need life insurance in your life? As the name itself suggest the meaning, we must buy the life insurance ONLY to protect our life but not for investing. But sadly 99% of Indian buyers still feel that Life Insurance is investment and tax saving tool. This is the mindset created by agents since long and by our parents. Because in olden days we don’t have any options like mutual funds or bonds. Only options of investments are Post Office Schemes, Bank FDs or Life Insurance products.
Before proceeding further, let us first understand the different variants of products available in India.
1) Term Insurance-These are pure Insurance plans where you are paying only for the cost your insurance company ready to take your life risk. This is a must for all who have financial dependents. But sadly no insurance company or agent ready to push this product. Do you know the reason? It is simple, if he sell you any traditional endowment plan (which combines Insurance with Investment) then your premium will be higher and he earns more. Instead if he sell term insurance then premium will be few thousands of rupees and obviously his earning will also be less. Currently few Insurance companies (except LIC) offering online term plans which are claimed to be cheapest because there will be no middlemen. But still there are few loopholes which I discussed here “Online Term Plans-Are they fare priced?“.
Let us simplify the meaning of term insurance. Suppose your age is 30 years and you opt for Rs.1 Cr term insurance for the tenure of 30 years then if you die during this 30 years period, your nominee will receive Rs.1 Cr. But if you survive till policy period then you will not receive anything from this plan. Only because of this reason that if one survive till the policy period then there will be no return from this plan, lot of people stay away from this plan, even this is the trick life insurance agent play in restricting you to buy this wonderful product. But think few seconds what will be your dependents financial health if you die today?
I listed the current available term insurance plans available in India. This list will be useful for you in selecting the suitable product. You can read the full article here at “Best Term Insurance plans in India (After 1st Jan 2014)“.
2) Endowment Plans-These are the plans which combine Insurance with Investment. Suppose you buy such products by paying a yearly premium of Rs.100 then some % of the paid premium will be towards the life risk premium and left out premium amount will be invested in any secured investments. If insured die during policy period then his nominee will receive SA+Bonus (till that period) otherwise at the end of maturity usually SA+Bonus will be payable for you. As these products combine both insurance with investment, even if you are paying hefty premium your life is not fully insured (ideal insurance coverage should be around 15 times of your yearly income+any current liability) and return from such policies will be around 7%, which in no way fulfill neither insurance need nor investment need.
Hence you MUST avoid such plans. There are again different variants in such traditional plans like money back plans or whole life plans. But the basic idea is same-These plans combine Insurance need with Investment and return will be around 7%. But 99.99% agents try to push these products as they earn hefty commission which will be around 35% in first year, 7.5% in 2nd and 3 years and 5% for the rest of the period. So by paying such hefty expenses do you feel that these plans will generate more than 7% return? There will be strong defense by agents community about the commission involved. But you must understand expense involved in each product before buying any financial product. Otherwise it will ruin your financial life.
3) ULIPs (Unit Linked Insurance Plans)-As name suggests, these products are linked to market. The only difference between endowment plans to ULIPs is, in ULIPs your investment will be in equity market. Based on the market performance your return will vary. These were very popular before IRDA‘s 2010 regulations. Before this regulation these product include hefty expenses like around 80% of your premium in first year itself. These products were sold like hot cake by private insurance as well as LIC agents claiming that your money will double in 3 yrs to 5 yrs. But sadly no one (including regulator) not understood that equity investment is for long term and hefty expenses means lower return to investor. So after 2010 minimum lock-in raised to 5 years and expenses like agents commission reduced drastically to be at competitive rate. After these changes, agents stayed away from these plans from their selling kit claiming that these products are risky as they directly linked to equity market. But in reality agents commission was reduced and they felt not lucrative product to sell.
So ULIPs are best to invest? My answer involves both YES and No. Yes if product have less expense, better managed (very difficult to track ULIPs return tracking) and if your goal is of long term in nature. Otherwise you must stay away from these products.
Now after going through the Indian Life Insurance market, which is best life insurance policy? My answer is “TERM INSURANCE”. By buying it and simply investing PPF or Bank FDs (return taxable) you can earn more than the agent’s choice of endowment plans. So go ahead buy TERM INSURANCE immediately without any waiting.
Image courtesy of [Stuart Miles] / FreeDigitalPhotos.net