Insurance @ Wealth & Retirement Planning Tool
Updated: May 18, 2021
Insurance- How much, in what kind of Product Insurance plans are meant to manage the life contingency risk first before extending their reach to cater to other life goals. A lot of financial goals of a household can be adequately covered by way of insurance plans. Amount of Insurance will be equivalent of gap in your Corpus that means Total Funds required as Gross Corpus to meet recurring expenses and all wish list at current cost minus available assets. How to choose the right insurance cover At the very basic level the sum assured should cover the normal lifelong expenses of the surviving family members.
Life insurance products come in a variety of offerings catering to the investment needs and objectives of different kinds of investors. Following is the list of broad categories of life insurance products:
1. Term insurance policies The basic premise of a term insurance policy is to secure the immediate needs of nominees or beneficiaries in the event of the sudden or unfortunate demise of the policy holder. The policyholder does not get any monetary benefit at the end of the policy term except for the tax benefits he or she can choose to avail of throughout the tenure of the policy. In the event of the death of the policyholder, the sum assured is paid to his or her beneficiaries. Term insurance policies are also relatively cheaper to acquire as compared to other insurance products. 2. Money-back policies Money back policies are basically an extension of endowment plans wherein the policyholder receives a fixed amount at specific intervals throughout the duration of the policy. In the event of the death of the policyholder, the full sum assured is paid to the beneficiaries. The terms again might slightly vary from one insurance company to another. 3. Whole life policies A whole life insurance plan covers the insured over his life. The primary feature of this product is that the validity of the policy is not defined so the policyholder enjoys the life cover throughout his life. 4. Unit-linked investment policies (ULIP) Unit-linked insurance policies belong to the insurance-cum-investment category where one gets to enjoy the benefits of both insurance and investment. While a part of the monthly premium pay-out goes towards the insurance cover, the remaining money is invested in various types of funds that invest in debt and equity instruments. ULIP plans are more or less similar in comparison to mutual funds except for the difference that ULIPs offer the additional benefit of insurance.
Pension policies let individuals determine a fixed stream of income post retirement. This basically is a retirement planning investment scheme where the sum assured or the monthly pay-out after retirement entirely depends on the capital invested, the investment timeframe, and the age at which one wishes to retire. There are again several types of pension plans that cater to different investment needs.
Since you started earning, agents are continuously trying to sell you one or other life insurance policy. But do you trust them blindly? In fact, we know some people who feel trapped and cheated because of the insurance agent. Thus, we should to choose best life insurance policy ourselves with aid of expert who should not have conflict of interest like agents having interest in their commission.
Returns from Life Insurance Products: Although actual returns would depend on one's age, term and the premium amount, the average IRR (internal rate of return) in most traditional plans, including money-back and endowment, lies between 4 and 6 % per annum. The plans with guarantee would carry even lower returns. You need to compare these returns with returns from Fixed Income products like Postal schemes. PPFs or Bank FDs minus cost of term insurance premium (which could be around 0.3% to 0.5%) and then take your decision. Agents have vested interest in pushing various plans but they have inherent conflict of interest vis. a vis. your returns.
The Agent commission will be dependent on term of the policy and type of the policy. The maximal commission the Insurance Agent gets in the first year is approximately 25-28% which in some cases can go to 40% and the commission is cut down to approximately 5% after the 4th year. For term plans they get 7.5% and hence it appears that agents push for policies other than term policies.
Of course, everyone in family should be sufficiently covered for health Insurance, which should be renewed every year.