All the Truth behind Insurance Plans

Generally people were either bulldozed into buying an insurance policy by persistent agents or were statutorily required to buy one. As a

result, there is a mental block against insurance. The soaring Sensex did spark an interest in unit-linked insurance plans as agents positioned insurance as an investment channel rather than a protection. But a few years on, buyers are again wary about ULIPs, what with regulators getting into a turf war over these products.

There is also confusion over comparing motor insurance plans. Until now plans were compared based on price. Now there are additional features to compare as well. Here is a five-minute guide which will cover most of what you need to know about insurance.

Truth about ULIPs

The most efficient method to earn stock market-related returns is to invest in equity. If you have got the capacity to analyse performance of industries and companies and are disciplined enough not to be swayed by the madness of markets, invest directly. For those who understand equities and have a good idea of their own risk appetite, but do not have the time to do the research or a regular review of their portfolio, mutual funds are the best option.

Particularly, systematic investment plans. For the rest (which is a very sizeable number) ULIPs are the best way to get a piece of action from the equity markets. If you make investment of Rs 4,000 every month of which Rs 2,000 is in a ULIP and the remaining Rs 2,000 is in an MF, if both funds turn in an identical performance, you will have a bigger accumulation under your mutual fund scheme. But should you die, your investment targets can remain on course under a ULIP unlike in an MF.

Also, after the recent reduction in charges, net of life insurance charges, ULIPs will offer a superior return over the long-term because they will have lesser charges compared to MFs. The biggest strength of a ULIP is that unlike a mutual fund scheme, ULIP fund managers do not come under any pressure to liquidate assets in a crashing market. The only catch is that investors should not fall prey to the marketing pitch, positioning them as short-term investments. In any case, tax reforms in future are likely to ensure that tax breaks are restricted to only long-term investments.

Truth about term plans

This is one cover that you must chase your agent for and not the other way round. First, let us consider the alternatives to term insurance. One option is to ensure that you have enough assets that generate enough returns to make up for the loss of your salary

the second alternative is that you live in a joint family structure where your relatives will take care of your family. In present times,

neither is really a viable option. Considering that term insurance rates have fallen by over 50% since liberalisation, there is no reason not to buy term cover. There is also no reason for not buying term cover in your 20s. And if you do not find an agent, there is always the online option. Aegon Religare’s term cover, which is the cheapest one in the market, is only available online.

Truth about single premium plans

These are really covers for people that do not otherwise need insurance. Guaranteed return single premium plans do make some sense when interest rates are at a high since these products offer an opportunity to lock into higher rates for a longer period. Plus they are tax free. Last year, LIC’s Jeevan Aastha provided a reasonably high-guaranteed return over the long-term. This year LIC has launched Jeevan Nischay which offers a much lower yield.

Truth about auto insurance

Until last year, it was easy to make a choice between two policies. You bought the one which offered cashless service at the cheapest rate. With insurance rates falling to around 1.5% of the car’s market value, it was not difficult to get a fix on how much the cover would cost either. All that has changed this year with a host of companies offering value-added services.

For the same premium as you paid last year, companies are now offering covers where you can get claims settled without any deduction for depreciation, free car wash coupons and replacement cars. But the truth is it makes little sense to claim for damages that are below a couple of thousands rupees. By doing so, you lose your no claim bonus. The bonus could result in substantial savings when a few years later you upgrade to a costlier car as no-claim bonuses move along with the owner.

Health insurance

The most comprehensive cover under health insurance is not sold to individuals, but their employers. Check if your employer has one and make sure that all your dependents are enrolled. Most group policies do not exclude pre-existing illness. Some even cover treatment related to chronic illnesses such as diabetes which are excluded under individual plans.

Individual health plans sold by public sector companies are becoming increasingly restrictive with sub-limits on how much you can claim. Like in auto insurance, there is a reward for policyholders for every claim-free year under health insurance. This is either in the form of an increase in sum insured or a free health check up. Availing of benefits from your employers cover therefore, makes sense
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