Choose a policy that suits your needs

28 Dec 2008, 0412 hrs IST, Ashish Gupta, ET Bureau
While choosing an insurance policy, the first step is choosing the insurance company. The factors that you need to look at are the promoters,
customer service, performance track record and the product portfolio. The next step is to understand your own financial needs, taking into account the life stage, risk profile, dependants, disposable income and liabilities. This will help you identify your protection and savings needs.

The amount of insurance required is a factor of your future earning capacity, your assets, and your liabilities. Insurance is not static and needs to be reviewed at different stages in life, depending on the changes in those factors. The amount of insurance required changes with factors like income of the family, assets and liabilities of the family, size of the family and the number of dependants in the family, the stage of life of the dependants - birth, education, marriage, and so on.

You need to think through all these to arrive at the suitable option and amount of life insurance cover. You should review your insurance needs at least once in every two years to take into consideration any changes in earning capacity, profile of dependents, cost of living, liabilities like housing loan etc to ensure that the life insurance cover is adequate.

Life insurance policies are long-term contracts. As such, it is important that you make the right choice of plan to meet your requirements . Unit-linked policies have several key advantages such as flexibility, transparency , simplicity, liquidity and efficiency in fund management . These policies are adaptable to the changing needs of the customers over their lifetime.

Participatory policies are less flexible and adaptable. Customers opting for these policies need to be certain of their milestone requirements and will have to time the purchase of their policy accordingly. Besides timing, they may have to buy multiple policies to meet different needs. These policies are restrictive in that they do not provide the option to rebalance the proportion of life insurance and savings within the policy.

Unit-linked plans are more efficient in their charge structure. The high level of disclosures required in these plans is an automatic check against an inefficient charge structure. At the same time, the level of awareness among consumers about the charge structures in life insurance plans is not very high.

The protection should provide for all the liabilities and future earning potential of the person insured. This will, at a minimum, ensure that the lifestyle of the dependants is not significantly altered if anything unfortunate were to happen to the person.

The savings portion should be determined by your financial goals. Life insurance as an investment instrument enjoys several distinct advantages. There is very little or no risk of capital loss, the long-term nature of the contracts ensures that investment horizons are long-term , thus leading to efficient funds management.

The regular nature of saving and the benefits of compounding ensure a substantial corpus over a period of time. The differentiating factors are flexibility, transparency and the customisation possibilities that are available in the product. These aspects are crucial to ensure that the product adapts to the changing financial needs of the customer. The structure of charges is specific to each insurer, which would derive that a seemingly high charge is not necessarily more inefficient than a charge structure that looks low. This is primarily because life insurance contracts are long-term contracts where charges can get levelled out over a period of time.