Tips on how to buy the right life insurance policy

It is tax-saving season, and you may be one of the many people who turn to life insurance plans to meet the 80C investment limit. That’s fine, as long as you don’t complain tomorrow that you bought the wrong policy and spend the next 19 years regretting it.

So here are some simple tips to help you make the right choices while buying a life insurance.

Don’t Understand? Don’t Buy: If you don’t understand how the plan works and you are just shown a rosy high-return scenario at the end of the policy term, simply say: “Thanks, but no thanks”.

While this logic applies to most financial products, it is particularly important for life insurance, where exit fees can be very high in traditional plans.

There are plans which are quite complicated with multiple triggers and factors influencing the returns. If you understand them, well and good. If not, then stay away.

Don’t be pushed into it: The deadline for submission of investment proofs may be fast approaching, but don’t rush into buying a plan. It is common for people, including financially savvy professionals, to just sign on the dotted line as they don’t have the time to spend on understanding the policy.

If the intermediary senses a signed blank form coming his way, chances are you will be stuck with a bad policy. Spend some time going through the illustration (which shows the possible returns scenario) and understand what you will be getting at the end of the term.

“What will be my returns at the end of the policy term?” is a question many customers ask after they have purchased a plan. You are supposed to buy a plan after knowing the potential returns.

Don’t believe promises of very high returns: The only type of plans having the potential of returns greater than 10 percent are ULIPs. With traditional insurance plans, keep expectations in the 4 percent to 6 percent range.

Even with ULIPs, the returns will be good only if the market performs well and you make some right moves with your fund allocations. The flip side to ULIPs is that you could also end up with very low returns.
Be wary of offers with side benefits

Some of the baits used to lure potential customers are:
Investments go into property, so expect very good returns
You will be eligible for personal loans at very low rates
Cash back after a period

Beware of such offers, none of which will be honoured by the insurance company as they are not part of the contract.

Plan long-term: Insurance plans are not short-term instruments. You need to have at least a 10-year horizon, so ensure that you will be able to pay the same premium ever year.
Don’t stretch yourself just to meet the 80C investment limit. Surrendering a policy midway can burn a huge hole in your investment plans.

Utilise the free-look period option: There is a mandatory 15-day period during which you can return a policy, and the money paid by you – minus medical costs and some administration costs – will be refunded. Some insurers extend this period to 30 days.

(Deepak Yohannan is the CEO of
MyInsuranceClub.com. An alumnus
of IIM Calcutta, he co-founded
MyInsuranceClub.com in July 2009.
Prior to this, Yohannan has held
senior management positions in leading
financial services organisations such as GE Capital, CitiFinancial and Moneyline India)