How to deal with ‘Orphan’ policies

Life insurance plays an important role in any individual’s financial planning process. For it is life insurance that helps secure the financial future of the nominees. However, many individuals do not know how to go about while considering life insurance products. We have identified five points to remember before zeroing in on a life insurance product. 

1. Identify your needs
Before considering life insurance, it becomes imperative that individuals first identify their needs. An individual should understand whether buying life insurance is necessary to begin with. For example, if an individual is single and earning but has no financial dependants, then he may not really need life insurance. This stems from the fact that nobody is going to be ‘financially hurt’ in the absence of the insured (i.e. the individual in question). 

On the other hand, we can consider a married individual who has family members dependent on him. He also happens to be the sole earning member in the family. Such an individual obviously needs life insurance. This stems from the fact that his entire family is dependant on him for financial support and in his absence, their lifestyle would be severely impaired. Such individuals should have adequate life cover as early as possible. 

2. How much insurance do you need?
After having identified the need to buy insurance, the next step is to ascertain the amount of cover needed. The concept of human life value (HLV) can help in deciding how much life cover an individual should opt for. The HLV takes factors like the individual’s annual income and expenses along with the inflation rate into consideration while calculating the value. 

3. Which product should you consider?
After having quantified the need for insurance, the next step is to finalise a plan that will fulfil the individual’s need. There are two kinds of insurance plans - term plans and savings-based plans. A term plan insures the individual for a high sum at a low cost. A term plan makes for a good fit in all individuals’ portfolios, irrespective of their profile. 

Many individuals also look at life insurance as a savings instrument. Here, apart from insuring the individual’s life for a certain amount (i.e. the ‘sum assured’ in insurance parlance) savings-based life insurance plans also give returns on maturity. This is unlike term plans, which act as a pure risk cover and do not give any returns on maturity.

Term plan: A feasible alternative?

	Age (Yrs)	Sum Assured (Rs)	Tenure (Yrs)	Premium (Rs)
Term Plan	30	2,000,000	30	7,000
Savings-based plan	30	2,000,000	30	51,500

As can be seen from the table, it could become expensive for an individual to adequately cover himself for the necessary amount with a savings-based plan due to the higher premiums. Instead, individuals can look at covering themselves with a term plan for the necessary amount and invest their savings in various instruments at their disposal like the national savings certificate (NSC), public provident fund (PPF), bank deposits and mutual funds.

Click here to understand the benefits of divorcing life insurance and investment needs 

4. Select an insurance agent
Having understood how much insurance is needed, an individual then needs to approach a life insurance agent. Individuals wanting to buy insurance should preferably opt for full-time life insurance agents. The agent should have a good track record to show for in terms of offering objective advice in the client’s favour and not his own. This will stand the individual in good stead over the long run since life insurance needs call for evaluation every few years and the insurance agent will help the individual with the same over a period of time. 

5. Compare policies across companies
Before zeroing in on an insurance plan from any company, individuals should compare policies across insurance companies. This will help them in evaluating which insurance plan is best suited to their needs. One way of doing this is by contacting the insurance agent and asking him for a comparative analysis of insurance plans. Another way is by visiting the websites of different companies and scouting for relevant information. 

For example, an ideal term plan for a 25 year old can be the one that offers him the necessary cover at the cheapest cost. For a unit linked insurance plan however, different criteria like expenses, fund management and flexibility offered will come into the picture. The comparison will differ across various parameters depending on individual needs as well as the type of plan chosen.

Click here to compare term insurance policies across life insurance companies

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