How do you choose insurance products?

Sanjiv Shankaran

INSURANCE companies are believed to be the most important source of long-term funds. That, in turn, leads to a high degree of sophistication in the manner an insurance company is run. Unfortunately, it is not just a company's operations that seem complex. The products are complex too.

Leaving aside the complexities in an insurance product, what is the primary reason to consider buying an insurance policy? Getting a risk cover that would provide a financial cushion for dependents in the event of an unexpected demise. There are a few products in the market that seek to meet the needs of people looking for a pure insurance policy, that is, a policy that has absolutely no investment option attached. A description of three such policies follow.

Birla Sun Life's Term Plan: The term plan offers pure insurance cover, that is, there are no monetary benefits once the policy expires. If the policy-holder fails to survive the life of the policy, the nominees get the sum assured. Unlike investment-oriented policies, there are no other benefits to look forward to.

Since a term plan is designed to account for only the risk arising from an unexpected event, the premium for the same is the lowest around. Policies with an investment dimension built-in, such as money back and endowment policies, are more expensive.

Among the other term plans in the market are those offered by HDFC Standard Life and ICICI Prudential. HDFC Standard Term Assurance Plan is designed on the same lines as Birla Sun Life's product. A pure insurance policy with no survival benefits.

ICICI Prudential offers a pure insurance policy under the brand name, Lifeguard. Lifeguard has two types of polices, one of which is a pure insurance policy, dubbed Single Premium Level Term Insurance. The single premium policy requires a one-time payment of premium and then provides a pure insurance cover. Similar to the policies mentioned earlier, there are no maturity benefits.

Riders: Birla Sun Life and HDFC Standard offer their pure life policies with riders (additional options that can be added to the main policy for a price). The key ones are those relating to death due to an accident or diagnosis of a critical illness, both of which can lead to higher benefits. But the central issue when buying a rider is to understand thoroughly the fineprint. Insurance policies have a lot of critical conditions when benefits have to be paid. Unless one properly understands them, a rider may be purchased for the wrong reason.

Suitability: A pure term policy is good option for people who do not want an insurance company to handle their investment. If one wants a lump sum to cushion the impact of an unfortunate event, a term policy is worth the money.

There is little to choose between the pure life products of most companies. Most products give the option of choosing different maturity periods, usually between five and 25 years. Over and above that, the riders impart a little more flexibility to the product.

One way to go about choosing a pure insurance product is to look at the liquid assets that dependents can bank on, and then opt for a life insurance policy that will provide enough to maintain a comfortable standard of living for dependents.