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Which insurance product should you buy?
Rajesh Relan
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January 03, 2008

The life insurance industry has come a long way since 2000, when private companies were allowed in. Today, there are over 500 products (over 3,000 with customisation options), and 16 companies to choose from. So how do you pick the one that suits you best?

Typically, your needs would be any or all of protection, wealth accumulation, wealth maintenance and retirement. A few basic products meet these needs.

Pure Term Insurance. In this, an amount is paid out in the event of the death of the insured within a specific term, say 20 years. This is the most basic and cheapest life insurance.

Endowment Insurance. In this, an amount is paid out in the event of the death of the insured within a specific term, say 20 years. If the insured survives the policy term, an amount is also paid to him.

Whole Life Insurance. This is similar to endowment, except that the term is whole life.

Riders. These are options that can be taken along with the product you buy and provide protection against additional contingencies such as disability or dreaded diseases for a nominal extra charge.

So, how can these products help you plan for your needs?

Protection needs include protection against death, disability, and dreaded diseases. Products that are suitable for this need are term or whole life insurance with riders like critical illness, waiver of premium (WOP) or accidental death benefit (ADB). Wealth accumulation needs include saving for children's education, marriage and/or getting them settled. It also includes saving for one's retirement. Suitable products in this category are endowment, money back and whole-life plans.

Wealth maintenance need arises when you have accumulated some money and want to protect and grow it in a tax-favoured manner. Short-pay endowments, pensions, single premium policies or dump-ins cater to such a need.

Retirement need arises when an individual reaches a stage in life when he does not anticipate future inflows, but has to provide for a regular inflow out of the funds he has accumulated, without any worry. You could consider single pay/short pay pensions or immediate annuities for this. A flexible unit-linked endowment, structured with regular partial withdrawals could also be suitable.

Once you understand your need and the suitable products on offer, you have to decide whether to buy a unit-linked or a traditional policy. Traditional plans would generally have guarantees over the long term and, hence, are unique among financial products. Instead of working with projections or illustrations, you would have assured cash flows in your financial plan. Unit-linked plans are also an effective mechanism to plan for your financial freedom as they give you the option to decide where you want to invest your moneyequity or debt. However, they usually do not have any significant guarantee.

So, once you have decided on the need, the product and the mechanism, ensure the following before you sign on the dotted line:

1. Understand clearly how the suggested product fits your need.

2. Understand which part of the amount is guaranteed and which is not. This is required to be illustrated as per the regulator.

3. Do not accept illustrations based on historical returns of a fund; they do not guarantee future returns. The regulator has prescribed that the illustrations be shown at 6 per cent and 10 per cent annual rate of return and though, in reality, the return could be much more than this, it is best to use these figures as guides for your financial plan.

A.R. Rahman is one of my favourite composers because he knows when to use Daler Mehndi and when to use Yesudas. He goes by the need of the song and hence the melody has longevity. So, don't buy a cover because your neighbour, whose needs are different from yours, has bought it. Buy only according to your own need.

The author is managing director MetLife India Insurance.

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