Many of you have been asking me on which insurance plan is best based on some of my reviews before. Though I might have missed some of your mails/comments, here comes an easy guide to follow while buying insurance. My analysis reveals that most of the young folks who just started their career are the ones who ask these kind of questions. They are the most confused souls and most of them will be in the cross roads when it comes to tax planning. With little knowledge, they try to save tax by purchasing some insurance, that too towards fag end of the financial year. Though on one hand, it is encouraging to hear that the young minds are thinking of early financial planning, choosing the right modes to invest makes all the difference. One of the most common mode that comes to such an individuals mind towards saving tax is always insurance. Let me repeat the golden rule – Don’t just invest for the heck of saving tax.
In this post, let me point out some of the common mistakes that people commit while purchasing life insurance. If at all you are planning to buy a life insurance policy, think twice before finalizing the plan. If you do this in a hurry based on insurance agent’s recommendations, you would just sign up for anything which is offered to you thinking of tax saving in mind. Read an excellent article on knowing whether you are investing in the right manner. Most of the times, even sign up for a plan blindly on any form they give you. It is very important for you to cross check everything and then make the first payment. Read the following tips before taking up any plan and hopefully this will answer most of the questions you folks have been asking. This is not only for the young folks but should be useful for all those prospects who are looking at buying life insurance.
- Evaluate your life insurance requirements & know liabilities/risks.
- Invest some good amount of time on researching about various life insurance plans, additional benefits & riders. Always compare similar plans from various insurance companies.
- Think of term insurance as your first choice among rest.
- More importantly, understand the extent of insurance cover required along with exclusions if any for a given insurance plan.
- Don’t rely on your agent to fill the insurance proposal, always do it yourself. Be truthful while filling the form as you or your nominee could lose the benefits from the policy in case any fact is misrepresented. Don’t ever provide your agent with a signed blank form.
- Some of the agents do lay a good trap by offering to pay the quarterly equivalent of annual premium certain policies in the first year. Simply don’t get fooled by these tricks, always look at the long term benefits.
- Another common mistake that people tend to do is that, they misrepresent some of the facts like age, health, family history, etc. Never alter medical facts as it can make the entire policy null and void. Your Insurance agent may advise you to misrepresent medical facts to help decrease the premium amount. This is never a smart thing to do! In the event of a claim, the misrepresented facts will come up & will be detected by claim settlement folks.
After all these, there is one final golden rule to abide by if you wish to reap the best out of insurance plans. If at all you get to hear any of the keywords mentioned below from your insurance agent about a particular plan, it is a certainly a red flag!
My best bet is always to go for a term insurance plan that gives the maximum cover on the premium paid. After this, you can choose to invest in other modes apart from insurance to fit your financial planning.
I have purchased Metlife Smart Plus ULIP with annual premium of Rs.30000/- on 2008 with SA as 24 Lakh. Now after 4 years premium paying valuation is not more than 1 Lakh. In this scenario, do you suggest to opt for surrender or go for cover continuance option. Please reply back.
shashank kashettiwar says
Have you read comment no. 41? If you find value in the process described, then do let me know. Mohan is allowing me to write a guest post on his blog regarding insurance and financial planning. This post may start appearing in this week if I start and submit my write up quickly(which is due for a long time now!).
I will start mailing the manuscript from Thursday. Ok for you?
Hi shashank kashettiwar
comment no. 41 didn’t ans my doubt .hope u will clear my quires by this week end
I am planning to take insurance SBI Life – Unit Plus II Child Plan to my child who is 7 years old .i have wasted so many years without taking insurance, after going throu ur site i had awareness. please suggest me right plan by comparing various insurance plan,because i am new to this comparison. hope u guide me right plan. i am very much impressed by Ur other suggestion. i want a corpus of 30 lakhs i can invest only 10000 per month.I am eagerly waiting to see your tips on financial planning thank u
I came accross a Insurance cum investment policy in Birla Sunlife which i am going to explain about.
Yearly premium – 30,000
Insurance coverage – 30,00,000
Yearly guaranteed return on investment – 10 %.
Fund Management and other charges (Including service tax)- 10,000
Mortality Charges ( This is amount for 30,00,000 Insurance coverage) – 5000
What they explained me is that initially the units will be bought for the 30,000. Then every month number of units will be subtracted for the fund management and Mortality charges as the unit value grows every month. Whats my point is even if i go for a term policy for my age it will be costing me arround 20,000 to 25,000 per year. Instead i am getting a term policy at 15000 (Fund Mgmt charges + Mortality charges). Also return on investment of 10% is the least return. It may go to 15 or 20% based on the market. So i feel this investment cum insurance plan is good. What is your view about it. This is totally contrary to your view of considering Insurance and investments to be separate.
Hi All, Here is some good news for those of you who have been asking for a comparison among multiple ULIP plans in India. I have posted a detailed article comparing various Guaranteed NAV ULIPs in one article, you can read it here – https://mohanbn.com/a-detailed-comparison-of-ulips
Thanks to Sumanth for his contributions to come up with this article.
Gr8 to read all your articles, but yet i am clueless about where to lean !! 🙂
I am an NRI, having SBI trading and i hope and pray that it will become something better by 2020. As SBI trading platform is so horrible (+ i am too good for making a profit) i turned to MF’s and is currently playing with various schemes.
Last week, an SBI-Life agent has blown my ears and eyes with money and i cant see anything else 🙂 whats your suggestion for my cure?
Continue game with SBI trading MF’s or settle down with SBI-Life? mean while i tried a shot with ICICI – Discovery fund which will give almost 200% growth ! Now future planning is scraping my brain out, spare some time…and help me.
Alex, I suggest you get in touch with some professional financial planner to make best out of your investments.
shashank kashettiwar says
Dear Mr. Jayant,
I want to thank u and Mohan for all the words and acts of appreciation and encouragement. Thanks Jayant for offering your participation and showing such a high level of committment by offering help to prepare the notes through even a telephonic talk to reduce my exertion of typing it out!
I have a suggestion. I will write and mail you scanned copies of the manuscript.You can mail me a draft or even if you upload directly , that’s ok.
Starting Tuesday , I will start sending you matter on every step in the flow. Every alternate day I will mail you the next material. Is that ok?
Unfortunately Mr. Manu has not shown further interest in the advice which I was offering him. He doesn’t seem to find any value in the write up and the process which I have described above. His would have been alive case so that others could have learnt out of it too. It would have also helped him in qualitative and in quantitative terms hugely . Nobody else also commented on it so far till your comment appeared.
It was definitely very disheartening for me. Because I do possess exceptional insights in the insurance planning and financial planning and would like to share it. Let’s see whether three of us; you, me and Mohan, together can spread it to a wider audience.
Which mail id should I send the material to?
Hi Shashank, I have initiated a mail thread between you, Jayant and myself. Let us continue there and it is not a good idea to share emails here since it might be good food for spam 🙂
Excellent Insights Mohan … ! Finally i got some one who speaks sense in “financial advisory world”.. 🙂
Keep it up Buddy … and thanks to all other contributors on the subjects… !!
Glad you liked the articles here! Keep coming back for more 🙂
Shashank Kashettiwar says
I will try and provide sensible answers to all the issues you have regarding your existing insurance plans and also how to rectify the scenario with regard to your insurance planning; not only life but other type of insurance needs also. We will also talk about how to integrate the insurance planning and the insurance portfolio within your overall financial planning too. But you will have to be little patient as I will be writing something at length which requires time for me to type and I’m rather slow at typing. So I will devide this advice into 3to 4 write ups possibly.
HOW TO DO INSURANCE PLANNING:
Following are the steps of insurance planning-
1) Identify your insurance needs spectrum(LIfe,Health,Accident/Disability,Property and Liability, long term care insurance-not available in India today)
2)Quantify the insurance need of every required type.
3)Quantify/Identify the total budget you should allocate for all the insurance needs .(Take into consideration the job and income volatility i.e. scenario and stress testing)
4)Creating a proper strategy(which can withstand changing income level,personal situation and market scenario)
5)Choosing the proper products/plans according to the strategy .
6) Finetuning the products,srtategy and the budget if required.(Includes customising the product i.e. riders,tenure,premium paying terms,no of plans in which the covers are devided etc.)
7)Implementing the plans i,e. choosing the right intermidiary channel-agents,advisors,brokers etc)
8)Monitoring the plans and making suitable alterations according to changes in market situations and personal situations.
Now I need to write atleast a page on each step to make all these steps clear to you. But I can guarantee ,with this education you will develop a clarity regarding the products,planning and overall placement in your financial planning alongwith other investments like MFs,Stocks,Real Estate,Debt instruments like FDs,NSCs etc.
As far your question about the plans in your portfolio is concerned;it is the step5 according to above mentioned flow. I can comment on it directly. But then the true significance of my comments/suggestions would be realised only if we move ahead step by step.
I’m assuming your income to be@10 lakhs i.e. your CTC. Please tell me the premium amounts also in the plans alongwith the SA.(even if you don’t, I can guess or calculate it from LIC tables .)
jayant bhat says
Dear Mr. Shashank K,
I am eagerly waiting to see your tips on financial planning. I can participate in preparing notes for you over telephone.
Srinivas Muthadi says
Do a little bit of research yourself. Lots of information is available on net. You will understand what is good for you. In general, returns from ULIPs are unpredictable if you don’t know how/when to switch, returns from any of the endowment policies (if you think it is saving) does not even match NSC (I put it as baseline for comparison which is minimum).
One way of marketing ULIP is showing the growth of NAV over a period of time, without giving any hint to how may units the Insurance company takes from us in the name of administration costs and agent’s commission during that period.
I am not sure if my investment cum insurance plans are appropriate
I am Project lead in a leading MNC software company and 29 years old and not married. I dont have any loans as of now
Here are my insurance policies
1)Jeevan Anand sum assured Rs300000
Premium period 20yrs and Term 75 years (already 5 yrs paid)
2)Jeevan Anand sum assured Rs 100000
Premium period 15yrs and Term 74 years (already 4 yrs paid)
3)New Jana Raksha Plan sum assured Rs 55000
Premium Period 15 yrs and term 15years( already 2 yrs paid)
4)LIC Mony Plus sum assured RS100000
Premium period 20 yrs and term 20 yrs(already 3 yrs premium paid)
5)Metlife Met Smart Plus
Premium period( min 3 yrs and max 10 yrs i guess) Premium amt 25000(already 3 yrs paid
As you can see most of these are policies i was forced to take due to the pressure my parrents had to give it the insurance agents of their choice. I am not saying evry policy is a waste. But please provide your analysis on the same
jayant bhat says
Underinsured, If you go through my previous article, you ignored the ‘what if you die’ part and only have focussed on ‘what if you live’ part. Check what you would get if wanted to surrender Jeevan Anand. Get out of those if you can even with minor losses. Check about guaranteed surrender values and surrender charges in specific.
You already have Met Smart Plus which is all in one product. Think of enhancing life cover through Met Smart Plus. Continue with Met Smart with enhanced life cover. This will work out as Term plan+pension plan+whole life plan. Continue paying premiums for MetSmart as long as you can. You
will reap good benefits out of it. Before you enhance the cover in met smart plus, check abt aegon’s iterm plan and see if it works out cheaper.Continue with Money plus.
Actually, you need a financial planners help but try out if you can do it yourself. Remember: Life cover is must, Never withdraw when mkt falls, always invest when mkt falls a bit. Dont Panic. If u ve invested in ULIPs or MF’s remain invested and continue investing with a long term goal.
Prakash K Sinha says
It is good to see Shashank put a different view, and better to see Mohan allowing him. It is in great fashion to suggest that insurance and investment do not mix. But saving linked insurance has survived decades and are still in vogue. ULIP gives low risk than MF and cost wise also they are comparable (after the revision by IRDA). All said, if we at all delink insurance and investment then what is better way to invest? No arguments for buying non-term insurance policies, but then can there be any argument for buying any thing in particular? These greedy agents have saved many families going broke.
SHASHANK KASHETTIWAR says
IRDA publishes an annual report. They publish all such data in this report for life and general insurance as well. There is even a grievances pending/processing data in this report. How efficiently the claims and complaits are being addressed by individual insurance companies can also be judged. Even if the available report is not the one showing latest data,still you get a fair idea about the working of the private and PSU players.
Jayant Bhat says
Life Insurance Council and IRDA. As on date, there is no sharing of claims data. I believe though I am unsure about it, either IRDA and/or Life Insurance Council team must be working towards transparency in this too.
Is there a trusted source from where one can get the claim settlement rate of different insurance providers? Does IRDA or any such org publish/ provide such a kind of info? Any help on this matter is highly appreciated.
Mohan now a days you are becoming financial expert!!! i think its time to switch your profession 🙂
and between nice points to dwell into next time i plan for insurance.
Jayant Bhat says
Excellent Notes. Very Informative. Thanks for such an article. I am looking forward for all futures tips and notes. Mohan, We need to know more about Mr. Shashank. I would love to see a great series of guest articles from you, Sir.
True.. I will plan to get in touch with him and possibly a series of guest posts if Shashank agrees 🙂
shashank kashettiwar says
Understanding Term Plans, ULIPs and Traditional Endowment Plans(A brief overview):
Term plans are considered the ‘cheapest’ form of buying life insurance. I would use the phrase ‘low outlay’ rather than the word ‘cheaper’ to descibe term plans’ premiums. The term plans as we know are called ‘level term plans’ because they charge a fixed , uniform premium throughout the tenure of the policy. So the risk premium being charged to a customer is kept constant. Now as you might be aware that the mortality charge or the risk increases with the age of a person even then how come the premium is kept same through the policy tenure for the same sum assured? This is achieved by charging more premium than the risk premium required for a particular age and investing this reserve money. These reserves are utilised to cover the gap between the level premium coming in at higher age when the mortality charge /risk premium for the later age is more than the level premium being charged.( This is akin to a 30 year old person being charged a premium of age 60 and the same person being charged a premium for age 30 years at age 60 in the same policy!)
So even though there is no saving element for us in a term plan, there is a kind of saving element available to an insurer which the insurer invests for possible later application/use. Now where would the insurer invest this amount? The insurance company is the most conservative investor. He invests and grows these reserves by parking them in G Secs i. e. Government Securities. He has already taken a big risk of insuring us for a small premium and he doesn’t want to take any further risks by parking these reserves in any risky/volatile asset classes. And why should he? because that is how he has designed his product and priced it. He could have priced it lower if these investments were made into high returns/yield type investments, which anyway is barred by the prudent business practices being followed and also by the regulatory mechanisms under which they operate.
As opposed to such ‘level’ premium term plans ther could be an increasing premium term plan where the premium is increased every year in accordance with the increase in mortality for that age. Such products are called ‘one year renewable term insurance’ plans. Wherein we don’t have to pay the future reserve money today only. So we can keep this money with us; grow it aggressively unlike the conservative insurer, and pay him the extra/higher premiums at higher age through this own fund and still be a winner in the whole deal as our rate of growth would be higher than the premium growth rate! Now wouldn’t a smart and active person love this type of product as compared to a ‘level’ premium plan? But alas, such products are not offered in India which are available in developed market. For two reasons these type of products are not offered. One is their saleability. People in general are uncomfortable with buying a product wherein the premium keeps on shifting and increasing over a period of timeand that too at a very fast rate in older ages. Second reason is the vulnerability of the insurer and the insurance concept itself! Those persons who are healthy and whose responsibilities are over would simply stop paying the premiums in old age as the premium seems to be exhorbitantly high to the initial premium they started with. So the pool of deceased and unhealthy individuals only would continue pushing up the mortality charges even higher and higher! So such smart sounding product like ‘ one year renewable term plans’ are not available for smart people! But don’t be disheartened because the similar theme is available in another surrogate plan…the ULIP!
A 30 yr old male if has to pay premium of 3200 -3500 for a 10 lakh sum assured in a level term plan for a tenure of 30 years, then he has to pay the mortality charge of just 1400-1600 when he opts for a ULIP. This is the INTERNAL LEVERAGE available when any savings type of plan is bought. How one utilises this ‘internal leverage’ is of utmost importance.(TO BE CONTINUED.)
Thanks for the insights and detailed information shared here Shashank. Look forward for more!
Jayant Bhat says
Term Insurance might not always be cheaper. I am an advocate of getting Insurance cover first. That might be inform of buying pure term product or buying ULIP with enhanced sum assured. The latter might prove extremely beneficial if bought after thorough comparison with other companies. As regards to companies, for any insurance company is ok as long as it is governed as per the IRDA norms. I would not go by company names, but see the charges charged by companies. The best of companies might have not so great portfolio managers and vice versa. My logic – It is my hard earned money, so I will invest after thorough Investigations.
SHASHANK KASHETTIWAR says
Premier Life and Life Time PensionII, these plans are not offered by ICICI Pru Life after 1’st Jan’10, when the new IRDA guidelines for ULIPs came into effect. So if someone offered to sell these plans in last calender year then please note they have been replaced with new product offerings( as is the case with other life insurers also).
If you already have these plans in your portfolio then only you need to analyse their utility. Then following three points might help you to make proper judgement.
1) ICICI Pru Life’s all plans were low cost plans as they had low to moderate allocation charges across all the ULIP products chiefly because of low commision paid to the agents. They didn’t have any hidden charges apart from whatever was shown in the plan’s illustration. So very transparent products which one can think of buying. BUT….
……should you buy?
2) A pension product should be bougth by a young person only after he/she has adequately insured him/her self. Because the insurance plan(savings type) is also going to create or contribute to the retirement kitty if you outlive the plan, isn’t it?
3) Premier life is/was a limited pay plan with the minimum premium amounts being rather high. Usually such plans should be opted for if the perceived job and income volatility is high. Such limited pay plans usually offer low or moderate multipliers of the premiums as the death benefit. The regular premium plans offer much higher premium multipliers and the entry level premiums are also much lower compared to limited pay plans.
I’m just providing some thinking pegs rather than going into the details of the plans,features,customisation and strategic placement in one’s insurance portfolio.
That was a comprehensive list of points to look at. Thanks for sharing Shashank.
Roshmi Sinha says
“Some of the agents do lay a good trap by offering to pay the quarterly equivalent of annual premium certain policies in the first year. Simply don’t get fooled by these tricks, always look at the long term benefits.
Another common mistake that people tend to do is that, they misrepresent some of the facts like age, health, family history, etc. Never alter medical facts as it can make the entire policy null and void. Your Insurance agent may advise you to misrepresent medical facts to help decrease the premium amount. This is never a smart thing to do! In the event of a claim, the misrepresented facts will come up & will be detected by claim settlement folks.”
True. ne must not be penny wise and pound foolish…
P.S. What is your opinion of ICICI Prulife’s “Premier Life” and “Life Time Pension II” schemes… ???
I haven’t looked at those plans yet. Let me do a review on both Premier Life and Life Time Pension II by ICICI sometime soon.
Roshmi Sinha says
Great! Look forward to that…
shashank kashettiwar says
Don’t rush to exit from the ULIP and Endowment Plan you have bought. That would be pretty hasty and unnecessary step you would be taking. Mind you’ TERM INSURANCE’ IS NOT THE BEST WAY OF BUYING LIFE INSURANCE.
Unfortunately most of the acclaimed financial planners and advisors/writers on personal financial matters are propogating this myth of ‘term insurance’ being the best solution without really understanding the nuances of the savings kind of insurance plans(e.g. Endowments and ULIPs), the proper placement of these savings plans in an individual’s insurance porfolio and the way it is to be effectively integrated with the overall financial planning alongwith other investment options(e.g.PPF, MFs,Stocks).
It will take me some time and length to explain these things lucidly, which I will do if the blog writers allow me.
Hi Shashank, thanks for your comment. I would be more than willing to hear from you in detail. Feel free to send me a mail from the contact page, I shall revert back to you on how you can write a detailed guest post on my blog.
Srinivas Muthadi says
Thanks Shashank for the advice. Off late I have been evaluating various options. I am not in a hurry. To be frank when I took those policies I did not even take a day’s time in finding out what they are. Took them blindly for two reasons : 1) For LIC policy, the agent was a ‘trusted’ family friend (seven years ago). I had a pessimistic outlook about safety and returns. 2) For ULIP from MYNL the numbers appeared great. I was under the impression that I could exit after 3 or 4 years. But agents commission and fee has has eaten away most of the money during this period.
Srinivas Muthadi says
Nice informative blog. But a bit late for me as I have already burnt my fingers with a ULIP and a ‘junk’ LIC endowment policy. And evaluating options to exit from them. Take term insurance.
Sorry to hear that. Wish I had published this much earlier.
just perfect 🙂
Ideally buy only Term Insurance without returns and insure only the earning member of the house… !!! no kids plan
first time here Mohan although I have been seeing you around… !
I think most people confuse investment with insurance… I used to be an Investment and Insurance Advisor and hope to resume in a few months…
Take it from me… go to Insurance companies for only insurance… not returns…
the thumb rule is insurance companies do give returns but their service charge is always higer than the other return yielding products… !
Hey hitchwriter! welcome to my blog. Yes, even I have been seeing you around except in my blog 🙂
That is nice to know about you. Absolutely, my thoughts are very much inline with yours!
Sucha nice post…especially at the right time , but then I guess that’s why you wrote this now. Thanks so much. I shall keep in mind.
** You provide so much info now I don’t know what all to actually keep in mind 😀
You are most welcome! well, when the knowledge is shared with others, it multiplies… I am just doing a bit of my part 🙂
I hv got to make an investment nw .. the last few bucks before I submit the proofs 😛 Thanks for all this info … makes my job simlpler 🙂
remember… insurance is not investment! 🙂
So term insurance is the best option for a person? How about tax benefit? Don’t we lose out on making the best use of 1 lakh cap if we have just one term insurance policy?
Yes, term insurance is anytime better than others. Well, like I have mentioned, don’t buy insurance plans to save tax. Read my previous posts on tax planning that should help you understand things and plan yourself better.
That is very informative! I am sure it will help a lot of us.
Nice to hear that! Thanks 🙂
Nice article for new comers , Do you think there can be a situation when Term Insurance is not the best choice a person can have ?
I liked the point where you said “dont reply on your agent”. That goes with the main idea of empowering people with education so that they can take decision .
Thanks! Yes, there are a majority of people who still expect some kind of returns from insurance which implies they look at it more like an investment than as insurance. That is not a smart choice in my opinion and for such people term insurance won’t fit. The very idea of combining insurance and investment is some what skewed in my opinion.
I said, don’t ‘rely completely’ on the agent ;), but true!
I can very well relate your article to my own experience with an LIC agent. Like you have mentioned, the agent did offer to pay one premium on my behalf when I delayed the decision of buying a policy. Now I understand the risk of completely relying on such agents.
As always great post Mohan, thanks for all the insights. Please keep posting more of such articles.
That is encouraging to hear it from you 🙂 Sure, will try to post such posts more often.