How difficult is it to buy a term insurance plan?

We all know that term insurance is the cheapest and the easiest form of insurance. But look at the travails of Business Standard reporter when he tried to buy a term insurance product from various life insurance agents in Mumbai.

Click here to read the story.

This is not an isolated case. We have also had instances of meeting the Insurance Advisors who go on talking about the various ULIP's and other products but never talk about the simple of insurance. We have seen rampant mis-selling of ULIP's by the advisors where the long duration products are sold to people who are in the age bracket of 55 and above.

We once had an opportunity to meet the Sales Development Manager of one of the India's largest private insurance company and the talk went towards what kind of products being sold pre-dominantly. He said he pushes only Unit linked products and when we quizzed him about the term policies he was not even clear about the products and it premium rates. That is the kind of environment we are in.

There is some good news from the biggest of the lot, Life Insurance Corproation (LIC). LIC has indicated that it would sell more of traditional products in the Financial Year 2008-09 and hopes to bring down the percentage of ULIP's to 70% of the total new policies sold.

It is a market where the buyers are to be aware. Caveat Emptor!!

Review of existing Insurance policies

We all own life insurance policies that have been acquired over the last several years due to reasons, which are not really towards, risk mitigation. We would have bought life insurance policies because the "agent" is our relative or a person who is known to us. We start servicing the policy acquired without ever realizing if these policies are cost-effective, matches our risk profile and provides adequate security. Therefore, it becomes imperative that we do a review of our existing life insurance policies and do a cost benefit analysis with regard to the premiums paid and the risk cover provided.

We came across a person of 32 years with the following insurance covers.

1. An Endowment policy for Rs100, 000 with double death benefit and a annual premium of Rs4100/-. The policy was taken 8 years ago for a term of 25 years.

2. A term policy for Rs300, 000 with return of premium after the policy term of 25 years. Annual premium is Rs3085/-.

Now considering his present financial position and his age, it becomes important that he has a higher life cover than the coverage of Rs500, 000 (from both the policies). For the premium of Rs7185/- per annum, it is possible that he could get a cover of close to Rs20, 00,000 for a term of 25 years. Therefore, it makes sense to discontinue the existing policies and go for pure term insurance policies with a much higher life cover. We need to keep remembering that Insurance is for meeting any exigency and never be construed as an investment.

Now the other important question that comes up is what we would do with the existing policy and how to salvage the premium amounts already paid. Here you don't have many options but to accept the surrender value of the policy. There will be definitely loss of premiums paid when you pre-close a policy, but you should also understand that there is still 17 more years left in the policy. Will it make sense to discontinue now or to go on for another 17 years with low risk cover?

Normally for policies, which have completed 5 years of service, the Insurance Company allows the policy to continue for 6 to 12 months from the due date of premium without allowing the policy to lapse. Therefore, it is prudent in this case to stop paying the premium for 2008 onwards and look out for alternative life covers. You will be able to enjoy the life cover for another 6 months from the due date and then approach the insurance company to surrender the policy and recover the surrender value.

To summarize:

1. Review the existing life insurance policies held by you periodically to find out if it is providing you with optimum cover.

2. If you are planning to re-engineer your existing life insurance policies, it makes sense to do it as early as possible. Preferably, it should be done before somebody attains 35 years of age to take advantage of the lower premiums till 35 years.

3. Go for pure term policies and not for term policies with return of premium unless you for some strange reason want the premium you have paid back at the end of the policy term. It does not make economic sense.

4. Make best use of the policy terms to ensure that the policy continues to be in force until you choose the new policy.

5. Surrender value in respect of policies can be used to plan your cash flows, as at times it is sizeable. In the above example, for the first policy the surrender value is close to Rs28, 000/-.

6. Last but not the least; Insurance should never be looked at from an investment perspective.