Choosing the right life insurance policy

Choosing the right life insurance policy

Choosing the right life insurance policy
Life Insurance plans are of different types. Some offer guaranteed returns, and others offer market linked returns based on performance of debt or equity markets.

That said, given the long-term nature of life insurance plans, and the investment guidelines that require companies to invest your funds in a diversified manner, even market linked life insurance plans are relatively safer.

Also, due to the long tenure of investments and protection offered, life insurance companies need to ensure that they have enough funds to meet their liabilities and sufficiently provision for the same. Thus making life insurance a good and stable long-term investment option.

Following are the suggested insurance products basis your risk appetite:

Low Risk: Would like to protect the investment and expect a return

Suggested Product: Endowment plans, cash back plans, deferred pension plans and guaranteed retirement plans

Insurance plans with a guaranteed return that safeguard the invested amount and provide a guaranteed return. These plans have a return declared at the end of the year, and the same gets credited and locked in to your insurance plan

Medium Risk: Would like to protect the investment and expect a return in line with corporate bonds and government securities

Suggested Product: Unit Linked Insurance Policy with investments in debt and balanced funds
Insurance plans that invest your money in debt or a balance of equity and debt funds. Also there are Unit Linked plans that upon earning a certain return, will transfer funds from equity to debt. 

Moderately High Risk: Equity market linked return expectation, but no time to actively manage funds

Suggested Product: Unit Linked Insurance Policies with investments in equity funds

Insurance plans that allow you to choose the amount you place in debt or equity. You could plan for a higher proportion of equity investments, or even plan for 100% of the fund to be in equity.

Since life insurance plans offer protection and investment benefits, they have mortality and policy administration charges levied on the premium. Based on these unique features of the product they are not easily comparable to other products. Comparison by breaking the product into individual components will not give you the right view.

Further, insurance policies offer a lot of flexibility in terms of premium paying modes and terms. Some plans even allow you to pay for a limited period of only seven years towards a 20-year policy. You also have the option of paying a lumpsum amount at one time. Thus, you can structure your plan as per your personal cash flows. In addition, some insurance plans in market, also offer liquidity in form of ability to partially withdraw from funds accumulated.

To illustrate, consider you have to make a corpus for your child’s higher education and would need the funds in 20 years. However, you are not keen on paying premiums for more than 10 years. You can choose a plan that has a plan tenure of 20 years with a limited premium payment term of 10 years. Further, given 20 years is a long time, in case of any requirement arising once you have paid all your premiums, you can exercise the option of partial withdrawal if available in your plan to use part of your investment as required.

(The writer is MD and CEO of IndiaFirst Life Insurance)

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