Tips on how to buy the right life insurance policy

If you don’t understand how the plan works and you are just shown a rosy high-return scenario at the end of the term, simply say: “Thanks, but no thanks”. While this logic applies to most financial products, it is particularly important for life , where exit fees can be very high in traditional plans. There are plans which are quite complicated with multiple triggers and factors influencing the returns. If you understand them, well and good. If not, then stay away.

The deadline for submission of investment proofs may be fast approaching, but don’t rush into buying a plan. It is common for people, including financially savvy professionals, to just sign on the dotted line as they don’t have the time to spend on understanding the policy. If the intermediary senses a signed blank form coming his way, chances are you will be stuck with a bad policy. Spend some time going through the illustration (which shows the possible returns scenario) and understand what you will be getting at the end of the term. “What will be my returns at the end of the policy term?” is a question many customers ask after they have purchased a plan. You are supposed to buy a plan after knowing the potential returns.

The only type of plans having the potential of returns greater than 10 percent are ULIPs. With traditional insurance plans, keep expectations in the 4 percent to 6 percent range. Even with ULIPs, the returns will be good only if the market performs well and you make some right moves with your fund allocations. The flip side to ULIPs is that you could also end up with very low returns.

Insurance plans are not short-term instruments. You need to have at least a 10-year horizon, so ensure that you will be able to pay the same premium ever year. Don’t stretch yourself just to meet the 80C investment limit. Surrendering a policy midway can burn a huge hole in your investment plans.

It is tax-saving season, and you may be one of the many people who turn to life insurance plans to meet the 80C investment limit. That’s fine, as long as you don’t complain tomorrow that you bought the wrong policy and spend the next 19 years regretting it.



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