In my views it is very important to know the answers of the few basic questions before buying an insurance policy and I think this not only helps to understand the policy better, but also ensures peace of mind during the entire policy term and afterwards.
In this post I would likely to share some questions what to ask to self before buying a life-insurance policy and is also helpful to understand the policy's terms and conditions better.
1. Why you need a life insurance?
I think the first question come in one's mind why he want to buy a insurance policy and what are the commitments that he wants to protect. For example,
1 whether he has made the complete coverage to pay the total outstanding of his debts specially outstanding balance owing on a mortgage loan (home loan) in his absence?
2 Whether he has made an arrangements to bear the loss of his income? If yes for how long?
3 What is his Contribution to the future education and marriage of his children?
4 What he has done for the financial freedom of his family?
5 How much money he want as old age pension?
By making a checklist one should Know what he would like to have arrangements and how much money one should have? By knowing this will help him to determine how much life insurance he need to buy a policy.
2 Who would he like to insure?
It is also equally important as the purpose of insurance because now a days most of the life insurance companies offer a variety of products which suits for lifestyle as well as family protection.
For example
A life insurance policy can be purchased
1 On there own life,
2 Get one policy for both him and his spouse (called a joint life insurance policy)
3 Policy for his child.
4 policy to cover the personal and family debts.
Remember that the purpose of insurance is not to think emotionally, but select the purpose which is able to protect the financial losses which we may suffer if some unfortunate event happens.
Identify the events that would be dangerous for the future of the family.
It means events that would cause a family to suffer serious financial losses and that would cause its members to substantially change their lifestyle and goals.
These risks are the death, serious illness, or disablement of the bread-earner(s). The death of the breadearner(s) is the biggest loose from a financial point of view, rather then the death of a child. By writing this i do not mean that child life is not important but our main aim would always be the smooth running of the family so think before you buy any life insurance plan what is the most important purpose to buy such plans.
3 How long will you need life insurance?
It doesn’t mean that we have to consult any expert. It means to calculate the estimating time of our life insurance needs. For example
What is the tenour of our home loan or by when our home loan be paid off?
It is important to determine the length of the life insurance policy.
When will our children became independent?
When are you planning to retire?
4 Do you understand the plan?
Before you purchase an insurance plan, it is very important to be very clear about the benefits the policy offers,
Its features such as
The tenure,
Payouts, (in case of many back)
Premium amount
Surrender rules,
and most important how it fits with in our needs.
Plan Type:
Mostly there are two types of plans available in the market
1. Market Linked
2. Traditional
Traditional plans are like
Term Insurance,
Endowment Plan,
Money Back Plan
In the traditional plans kinds of benefits you get are known before you buy the plan but in Ulip plan the kinds of profits does not know before you buy the plan because Ulip plan is a market-linked instrument. In ulip plan premium is also divided into two parts :
one part used for insurance coverage and other part for investment in funds which provide returns that are linked to the markets.
Mostly the insurance company invest these funds in the combination of debt and equity-linked instruments.
Based on the risk profile of the customer, has been made.
Premium Mode:
Single Premium or
Regular Premium
When you think to buy an insurance policy, you will have to pay a fixed amount to the insurance company every year is called as premium.
Some policies are there where it can be a one-time payment instead of an recurring payment is called signal payment plans. Means Pay the premium once and for all and the policy will stay in force till the end of the coverage period.
In other polices one can choose the frequency of payment, for example, annually, monthly, or quarterly.
Premium amount for a single policy will be more for the regular premium. Frequency of payment also affects the Premium amount just like the annual premium will be always lesser than half yearly and quarterly or quarterly permium is lesser than monthly.
5 Premium Paying Term and Tenure of the plan
Tenure or Term :
The term of the policy is the period for which an insurance policy provides cover or the number of years you choose to insure yourself also called as the Tenure. If you buy it for 10 years, the policy is described as one with a 10-year term.
Premium paying Term
The number of years you pay premium on your policy. Usually the premium paying term is the same as the policy term. However, some policies offer you the option of selecting a premium paying term that is lesser than the policy term.
6 Benefits
When an insurance agent recommends life policy to you, the agent has to give you a benefit illustration. I am not saying this as a benefit illustration, he only suggests and illustrates the benefits of the plan.
Mostly the illustration is made to assume the rates of return prescribed by the Life Insurance Council but the variable benefits depends on the financial institution future investment return, mortality, expenses etc.
It always kerp in the mind that these illustrations are only and only depends upon the benefits payable in the past experience. Here the main objective of the illustration is that the proposer easily understand the features of the product and the flow of benefits in different circumstances with some of figure works.
7 Benefits does it match your needs
Insurance plans offer a wide range of benefits.
Some gives periodic payouts,
Some gives a lump sum on maturity,
Some allows equity exposure,
Some gives a dual insurance cover.
Some benefits are available during the term of policy
Some at maturity.
So think before you buy a life insurance whether you understand what benefits are available which you like to buy and what is its bouns (guaranteed bonus, variable bonus) and when the benefits of the policy mature.
Here I want to add that first you understood that all the benefits are suitable or not because all the benefits are not suitable for all investors. For example, A young person in a job with rising income will not be benefited much from a money-back plan because it gives periodic payouts.
A child plan will not be of much help if your son is already in his teens and you need money for his college education 4-5 years later. Similarly, a low-yield endowment plan that offers minimam cover may not suit a person who needs to insure himself for a sizable amount.
8 Lock-in period and Surrender Charges
Lock-in period is the period during which an investor is restricted from selling a particular investment or will not get any benefit. For example, Ulip plans.
you might want to discontinue the policy and take whatever money is due to you. The amount the insurance company then pays is known as surrender value.
If you discontinue to pay the premiums, but do not withdraw the money from your policy, the policy is referred to as paid up.
9 Charges
Each insurance company levies some charges on an insurance policy. They are
The premium allocation charge, mortality charge,
Fund management charge (in case of ULIPs)
commission paid to the agent.
It is always advisable to understand these because it is going to deduct from the policy’s account
10 Tax benefits
If you are taking policy for tax benefits check whether you will be able to claim it or not. Tax benefits on life insurance policies fall under two categories :
Deductions under 80C section
Insurance products give you deduction of up to Rs 1,50,000 (from FY 2014-15. Earlier it was Rs 1,00,000) from taxable income under 80C.
Tax benefit on benefits received under section 10(10D) . Tax treatment of policy on maturity or death of policyholder, on receipt of surrender or paid-up value, is similar.
During and after buying the policy
Fill in the proposal form yourself provide true information about your health, financial status and occupation.
Read the policy document carefully and understand the terms and conditions.
Intimate change in address, contact number, e-mail id and nominee to the company on priority.
Having all the relevant policy documents in safe place
otherewise critical at the time of claim settlement.
Misplacing or lose any of the policy documents, make sure that you immediately apply for duplicates.
In this post I would likely to share some questions what to ask to self before buying a life-insurance policy and is also helpful to understand the policy's terms and conditions better.
1. Why you need a life insurance?
I think the first question come in one's mind why he want to buy a insurance policy and what are the commitments that he wants to protect. For example,
1 whether he has made the complete coverage to pay the total outstanding of his debts specially outstanding balance owing on a mortgage loan (home loan) in his absence?
2 Whether he has made an arrangements to bear the loss of his income? If yes for how long?
3 What is his Contribution to the future education and marriage of his children?
4 What he has done for the financial freedom of his family?
5 How much money he want as old age pension?
By making a checklist one should Know what he would like to have arrangements and how much money one should have? By knowing this will help him to determine how much life insurance he need to buy a policy.
2 Who would he like to insure?
It is also equally important as the purpose of insurance because now a days most of the life insurance companies offer a variety of products which suits for lifestyle as well as family protection.
For example
A life insurance policy can be purchased
1 On there own life,
2 Get one policy for both him and his spouse (called a joint life insurance policy)
3 Policy for his child.
4 policy to cover the personal and family debts.
Remember that the purpose of insurance is not to think emotionally, but select the purpose which is able to protect the financial losses which we may suffer if some unfortunate event happens.
Identify the events that would be dangerous for the future of the family.
It means events that would cause a family to suffer serious financial losses and that would cause its members to substantially change their lifestyle and goals.
These risks are the death, serious illness, or disablement of the bread-earner(s). The death of the breadearner(s) is the biggest loose from a financial point of view, rather then the death of a child. By writing this i do not mean that child life is not important but our main aim would always be the smooth running of the family so think before you buy any life insurance plan what is the most important purpose to buy such plans.
3 How long will you need life insurance?
It doesn’t mean that we have to consult any expert. It means to calculate the estimating time of our life insurance needs. For example
What is the tenour of our home loan or by when our home loan be paid off?
It is important to determine the length of the life insurance policy.
When will our children became independent?
When are you planning to retire?
4 Do you understand the plan?
Before you purchase an insurance plan, it is very important to be very clear about the benefits the policy offers,
Its features such as
The tenure,
Payouts, (in case of many back)
Premium amount
Surrender rules,
and most important how it fits with in our needs.
Plan Type:
Mostly there are two types of plans available in the market
1. Market Linked
2. Traditional
Traditional plans are like
Term Insurance,
Endowment Plan,
Money Back Plan
In the traditional plans kinds of benefits you get are known before you buy the plan but in Ulip plan the kinds of profits does not know before you buy the plan because Ulip plan is a market-linked instrument. In ulip plan premium is also divided into two parts :
one part used for insurance coverage and other part for investment in funds which provide returns that are linked to the markets.
Mostly the insurance company invest these funds in the combination of debt and equity-linked instruments.
Based on the risk profile of the customer, has been made.
Premium Mode:
Single Premium or
Regular Premium
When you think to buy an insurance policy, you will have to pay a fixed amount to the insurance company every year is called as premium.
Some policies are there where it can be a one-time payment instead of an recurring payment is called signal payment plans. Means Pay the premium once and for all and the policy will stay in force till the end of the coverage period.
In other polices one can choose the frequency of payment, for example, annually, monthly, or quarterly.
Premium amount for a single policy will be more for the regular premium. Frequency of payment also affects the Premium amount just like the annual premium will be always lesser than half yearly and quarterly or quarterly permium is lesser than monthly.
5 Premium Paying Term and Tenure of the plan
Tenure or Term :
The term of the policy is the period for which an insurance policy provides cover or the number of years you choose to insure yourself also called as the Tenure. If you buy it for 10 years, the policy is described as one with a 10-year term.
Premium paying Term
The number of years you pay premium on your policy. Usually the premium paying term is the same as the policy term. However, some policies offer you the option of selecting a premium paying term that is lesser than the policy term.
6 Benefits
When an insurance agent recommends life policy to you, the agent has to give you a benefit illustration. I am not saying this as a benefit illustration, he only suggests and illustrates the benefits of the plan.
Mostly the illustration is made to assume the rates of return prescribed by the Life Insurance Council but the variable benefits depends on the financial institution future investment return, mortality, expenses etc.
It always kerp in the mind that these illustrations are only and only depends upon the benefits payable in the past experience. Here the main objective of the illustration is that the proposer easily understand the features of the product and the flow of benefits in different circumstances with some of figure works.
7 Benefits does it match your needs
Insurance plans offer a wide range of benefits.
Some gives periodic payouts,
Some gives a lump sum on maturity,
Some allows equity exposure,
Some gives a dual insurance cover.
Some benefits are available during the term of policy
Some at maturity.
So think before you buy a life insurance whether you understand what benefits are available which you like to buy and what is its bouns (guaranteed bonus, variable bonus) and when the benefits of the policy mature.
Here I want to add that first you understood that all the benefits are suitable or not because all the benefits are not suitable for all investors. For example, A young person in a job with rising income will not be benefited much from a money-back plan because it gives periodic payouts.
A child plan will not be of much help if your son is already in his teens and you need money for his college education 4-5 years later. Similarly, a low-yield endowment plan that offers minimam cover may not suit a person who needs to insure himself for a sizable amount.
8 Lock-in period and Surrender Charges
Lock-in period is the period during which an investor is restricted from selling a particular investment or will not get any benefit. For example, Ulip plans.
you might want to discontinue the policy and take whatever money is due to you. The amount the insurance company then pays is known as surrender value.
If you discontinue to pay the premiums, but do not withdraw the money from your policy, the policy is referred to as paid up.
9 Charges
Each insurance company levies some charges on an insurance policy. They are
The premium allocation charge, mortality charge,
Fund management charge (in case of ULIPs)
commission paid to the agent.
It is always advisable to understand these because it is going to deduct from the policy’s account
10 Tax benefits
If you are taking policy for tax benefits check whether you will be able to claim it or not. Tax benefits on life insurance policies fall under two categories :
Deductions under 80C section
Insurance products give you deduction of up to Rs 1,50,000 (from FY 2014-15. Earlier it was Rs 1,00,000) from taxable income under 80C.
Tax benefit on benefits received under section 10(10D) . Tax treatment of policy on maturity or death of policyholder, on receipt of surrender or paid-up value, is similar.
During and after buying the policy
Fill in the proposal form yourself provide true information about your health, financial status and occupation.
Read the policy document carefully and understand the terms and conditions.
Intimate change in address, contact number, e-mail id and nominee to the company on priority.
Having all the relevant policy documents in safe place
otherewise critical at the time of claim settlement.
Misplacing or lose any of the policy documents, make sure that you immediately apply for duplicates.
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