JOIN USOne of my cousins had bought an immediate annuity single premium life insurance policy out of his retirement benefits from a reputed life insurance company some time back. He got the shock of his life when he received renewal notice from the insurer for payment of yearly premium of Rs 4 lakh. He was shocked because he had signed up for a single premium policy while the particulars in renewal notice mentioned the policy as a regular policy!
After enquiring with the insurance company and pleading that his annual income, post retirement was less than the annual premium of Rs 4 lakh, he found out that his proposal form which he had signed blank was filled up by the agent who had converted the single premium policy to a regular one!
His I-T returns were also manipulated by the agent and income was inflated! Was my cousin gullible to sign a blank proposal form? And was the agent who sold him the policy was unethical in tampering his I-T returns? This brings us to the larger malaise in the industry, the malaise of gross mis-selling in the insurance industry. So the next time you are buying a life insurance policy, the following points might help you avoid such unpleasant situations.
Should you sign a blank proposal form?
Make sure that you fill in all the particulars in the proposal form yourself and never sign the proposal form blank. Even if you do make sure you go through the details when you receive a copy of it along with the policy document. If you are not happy with the policy, you could always return it during the free look-in period.
What type of insurance should you buy?
There are broadly two types of life insurance policies. Those which are plain vanilla term plans which have only death benefits and others that have death as well as maturity/survival benefits. The choice depends on whether you look at life insurance as a risk management tool or investment. The bottom line is life insurance should not be confused with wealth creation or investment.
What is the cover you need?
Cover or sum assured is the amount that is assured by the insurer on maturity of policy or on death of the policy holder. The thumb rule is life insurance cover should be at least 10 times of your annual income. Assume that x’s annual income is Rs 8 lakh. So X must have life insurance policies with a sum assured amount of Rs 80 lakh. If X were to die his family would get Rs 80 lakh and assuming that this money is kept as a deposit in a bank which gives 8% interest, the family will get Rs 6.40 lakh as interest income which may not make up for X’s income prior to his death, the family is financially compensated to some extent.
Which option should you choose –surrendering or discontinuing the policy?
The option you choose depends on the type of policy you have bought. Surrendering policies having maturity benefits before maturity can be costly as you could lose substantial benefits. On the other hand, under term plans, since they do not have any surrender value, you can simply stop paying the premiums the moment you don’t feel the need for life insurance.
What are the tax benefits?
Most of the life insurance policies are bought because policy holders can claim deductions under Sec 80C on the premiums they pay. Also maturity proceeds are exempt from tax under Sec 10 10 D of I-T Act. You should buy insurance for insurance sake only and not for the tax benefits they offer.
What are the charges you have to pay?
The charges that you pay in a life insurance policy vary from policy to policy and are recovered from the premium you pay. While term plans have mortality charges, a ULIP will have other than mortality charges, policy administration charges, premium allocation charges, fund management charges, etc., and these charges are normally disclosed in the brochure. Traditional plans like endowment and money back plans do not disclose the charges and the distributor/agent gets the highest commission in these policies.
(The writer is a former banker. He is currently teaching at Manipal Academy of Banking, Bengaluru)