Insurance is the subject matter of solicitation

Next time when you come across an advertisement by an Insurance company, read carefully. You shall come across the following disclaimer that says “Insurance is the subject matter of solicitation”. Ever wondered what this term means? As a consumer , this disclaimer/warning is of utmost importance but often ignored.

According to the dictionary, the meaning of the term “solicitation” is ” to ask for”. Therefore,the above disclaimar essentially means that insurance has to be requested or asked for, not sold ie; you should be the one calling an insurance agent asking him to sell you a particular policy of your choice and not the other way round. Unfortunately, in real life, the case is exactly the opposite. Traditionally, in India, people buy insurance products not because they need them, but because they are goaded to buy a policy to please a neighbour, relative or a friend who is also an insurance agent.

The above disclaimar is extremely important as it puts the responsibility for selecting the right product on the consumer rather than on the company or the agent. But we know that most of the consumers are not aware about either their needs or the various options available before them. Hence the consumers have to obtain the help from a trained financial planner/advisor who will ” advise ” him/her in choosing the right insurance product.
Here is the list of some of the questions one should ask the insurance agent before being sold an insurance policy.

  1. Is the agent qualified or authorised to suggest me a financial product?
  2. Am I presently under Insured or over Insured?
  3. What Insurance product will suit my needs the best and what are its features?
  4. What shall be my financial commitments if I buy a particular policy like premium amount, premium paying term, frequency of payment etc.?
  5. What differentiates this Insurance product & how does it compare with other products in the market?
  6. Do I really need this product?

We think that asking such probing questions will help you better understand the reason why you’re buying a policy and whether it’s for savings, tax rebate, life insurance or long-term wealth creation. If you ask us, your insurance policy should serve all these purpose at the same time.

Also, it pays to have a basic knowledge about the type of insurance products. Insurance products are basically of following 4 types:

  1. Term Plans
  2. Money Back Plans
  3. Endowement Plans
  4. Unit Linked Insurance Plans (ULIPs) Plans

Term Plans are pure risk cover insurance products that do the job of insuring your lives against death with zero maturity value ie; in case you survive the policy term, you will not get anything. There is no investment element here. Only in case of the insured dies during the policy term does the family get the sum assured (the amount of insurance cover). So why should you go for this plan. Because this is the only pure insurance product that does exactly what a life insurance product should do; provide your family the much needed financial security in case of your untimely death. Also, this is the cheapest category of life insurance product that money can buy.

Beside term plans, all the other types of insurance products are insurance cum investment products with some variations. While Money back plans are generally with-profit plans that aim to provide a return on your investments at regular intervals over the policy term, endowment plans on the other hand aim to create a corpus for you at the end of the policy term. Money back schemes provide for periodic payments of partial survival benefits as follows during the term of the policy, of course so long as the policy holder is alive. An endowment policy on the other hand makes provisions for the family of the life assured in event of his early death and also assures a lump sum at a desired age which can be reinvested to provide an annuity during the remainder of his life or in any other way considered suitable at that time.

ULIPs as the name suggest is the modern avatar of the Investment cum insurance product offering the investor a variety of investment options to choose from. So why not go for ULIP that offers insurance as also investment option. ULIPs by their very nature are very long term products and are beneficial only if you are willing to stick out for a minimum of 15 to 20 years with the product else they prove to be extremely costly in the short run. As for the other investment cum insurance products, while they might involve a savings element, yet all these plans prove to be much costlier compared to a term plan and as a result might not allow you to buy enough insurance.

So what’s the solution? Well, we firmly believe that if there is one insurance product you are going to buy then let it be a pure risk cover TERM PLAN with adequate amount of insurance. Adequate amount of life insurance varies from person to person and depends on a number of factors including your standard of living, age , no. of dependents , income level, your existing savings & so on. Consult a financial advisor to find out the right amount of insurance for you & your family.
As for your investing needs, we believe that the mutual fund industry along with the small savings schemes like PPF, Senior citizens schemes & Bank Fixed Deposits offer good enough options to suit every individuals profile & financial goals. They are cheaper & offer liquidity & flexibility as well & can also cater to one’s tax savings requirement.

So keep it simple. As far as possible, do not mix insurance & investment. This rule will allow you to buy adequate insurance cover for your family keeping your premium low thus allowing you to save & invest the spare money for meeting most of your financial goals.

(Mr. Nirav Panchmatia is a financial planner practicing under his firm “AUM Financial Advisors”. He is a CA & MBA Finance from Narsee Monjee, Mumbai having spent last 8 years in Mumbai working in leading financial institutions like Citigroup, ICICI Bank, IRIS, etc. He can be reached on 93237 39968 or on his email: [email protected]. The above article is meant for general reading only)

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