Which type of Insurance should I Buy?

Insurance is important and we should do it as early as possible. Click here to read my last article for detail discussion on this.

However whenever we think of a insurance policy, the first question that comes to our mind is to the type of insurance that should be taken. There are various types of insurance and there are many agents to confuse you for their own benefit. In this post, I will try to make your life a little easier to select a particular type of Insurance that suits your requirement and meets your criteria.

Picture sourced from Internet

The various types of Insurance available in the market can be broadly classified into two categories:

1. Non-Market linked insurance
2. Market Linked Insurance.

Non-Market linked Insurance:

Before the share markets directly or indirectly started affecting our lives, the traditional types of insurance were the only choice available to us. But, in this category also, there are various alternatives that one can opt for.

a) Term Insurance: For me this is true insurance. You pay specified premium for the life cover you want. There are no returns/benefits apart from the insurance cover or any rider you choose. Before Private players entered the business, this insurance was not being recommended by any agent, the reason being there was very low commission. For me this is the best insurance policy one can have, reasons I will explain later.

b) Endowment Plans: Same as Term Plans but with survival benefits attached to it. At the end of the tenure, you get a lump sum amount, which will be including of interest and bonus as decided by the insurance company.

c) Money Back Plans: Same as Endowment but under this plan the returns are on periodical basis say yearly during the tenure of the insurance.

The premium for Endowment and Money Back plans are high. There are policies like Return of premium where you get back the amount of premium you have paid during the tenure at the end of the tenure without any addition. There are wholelife policies as well where the coverage continues even after the tenure of premium payment is over. Further there are many other types of plan available in the market which are mixture of the plans mentioned above.

Market Linked Insurance:

In simple terms these policies are known as ULIP (Unit Linked Insurance Plan). Part of your premium is invested in the share market and your return from the insurance policy is dependent on the performance of the share market. This is riskier among all the policies mentioned as you carry the market risk.

I will not talk in detail about each types of policy because there are information available in the net. What I will talk about is the policy one should choose.

Before choosing a policy, you need to answer a few questions:

• What kind of investment you like? Are you a person who wants to play safe as far as investment in concerned or you can take risk?
• Are you a person who can monitor your investments on regular basis?
• Do you have time to spare to look into the investment part?
• What are the fund requirements 

Before you take an insurance it is important that you need to understand yourself and your requirements. If you are a person, who wants to play safe you should never look into any market linked policies because the risk is high. If you want regular cash flow on yearly basis you should look for money back plans. But I have a different advice for you. I will always suggest Term Insurance Plan provided you can spare a little bit of time to think about your future investment on regular basis.

When your choose a policy like Endowment /Money Back / ULIP your premium becomes automatically high, whereas in term plan the premium is low. I had done an analysis and found that if you invest the amount you pay extra as premium, in some Fixed Deposit /Recurring Deposit in a bank, you get similar amount of return, however  you have to monitor the interest rates increase and decrease and shuffle your fund accordingly. The biggest benefit of such investment is liquidity, which means that you are free to use the fund whenever you have requirement. One may argue that there are loan options available in the non-market linked policy and in market linked policy partial withdrawal is possible, which gives liquidity but your eligibility in such cases will be lower than the current value of your policy which at times may not sufficient.

If you are not averse to risk, you may invest the balance in share market directly or through mutual fund and can even expect higher returns. The only point here is that you have to monitor your investment yourself. To be frank this doesn’t require much of time. Now the argument here will be that ULIP does the same thing for us, why should we bother. Yes, you should not be bothered if you don’t have time. But if you have time, it is a well know fact that return from Mutual Fund is higher than ULIP investment, so why one should do ULIP rather you take a term plan and invest the difference premium in mutual fund directly. The return will always be better and again the liquidity will be high.

Since I have been saying liquidity multiple time, I would also like to raise a caution. It should always be noted that like insurance is a long-term plan for your life, an investment should also be seen as long term, and if you break a long-term investment, you should use that money to acquire a long-term asset like house property, which will appreciate in the future. If you cannot manage such investment portfolio and have the tendency that you might use this money to buy a car in the future the value of which will depreciate with time, it is better that you should go for Endowment / Money Back / ULIP based insurance policy, based on your risk appetite and requirement.

Very Very Important Note: There are many who have taken ULIPS, this information is for all of them. Recheck the frequency of your premium payment. If it is any mode other than monthly, change to monthly mode immediately. No Insurance Agent will advise your for this because the agents get high commission on the first premium and their commission in the followup premiums is very low, so their own benefit they advise you  yearly mode. You should remember that whenever you pay your premium the insurance company buys units in your name from the market and allocate it to your name, now if your mode of payment is yearly you completely depend on the market position at the time of your premium payment. If the market is at high level and after you are allocated with the units and market crashes you loose immediately. But in case of monthly mode of payment you spread your risk, you invest monthly so to certain extent you are immune to erratic movements, in market terms you can average out the market. 

Insurance is a vast sphere thus it is not possible to cover everything and I don’t think I have complete knowledge as well. I have shared what I researched during last few days. If you have any queries, please put in as comment, I will do my best to clarify. But yes, I would request only one thing, what you chose, do insure yourself, it’s for your family.

Disclaimer: I don’t work for a Insurance Company, nor do I have investment in Insurance sector :) :) :) :)