How to compare policies and select the best

Till a few years back, the neighbourhood insurance agent was the only person who could tell you the best life insurance policy available.

But again how do you know which one is the best? Here’s where portals such as www.policybazaar.com and www.i-save.com come in handy. They offer you the power to compare insurance products across the market. But before you compare, you need to know what insurance you want and the parameters on which to compare. Here’s a little prep.

What you want to buy

You first need to decide which type of life cover you want. Broadly, there are three types to choose from.

The most basic is the term plan. It pays the nominee the sum assured on death of the insured and gives nothing if the insured survives the term. A term plan is a must for all individuals who have dependants. Since it deducts only the cost of insurance it is the cheapest.

Second is the traditional insurance-cum-investment plan. In addition to offering a life cover, these plans also invest your money. So if you die your nominee gets the sum assured but if you survive you get a maturity corpus. But traditional plans suffer from an opaque structure which makes them more of a guaranteed benefits product; you pay a certain amount as premium for a certain amount of death benefit or maturity corpus. Because of this certainty, they invest mainly in debt products.

Third is unit-linked insurance plan (Ulip) that also invests in equities and has a transparent investment and cost structure.

What to compare

After you have decided which type of cover you require, you can compare policies on different levels. However, the most basic and effective level is to compare the cost and benefit of insurance policies in the same category.

Term insurance: For term plans, premium is the most important factor. You need to compare the premium charged for a certain amount of sum assured by various insurers.

Traditional plans: Since traditional plans are guaranteed benefit plans, comparing what you get back after paying a certain amount is most important.

Typically, the sum assured is a guaranteed benefit in a traditional plan. For instance, a traditional endowment plan with a sum assured of ₹ 10 lakh for a term of 20 years would mean that the policyholder would get ₹ 10 lakh on maturity or the beneficiary would get ₹ 10 lakh upon death of the insured during the policy term. Compare premiums across policies to get an idea on returns. To illustrate, take the above example. A 30-year-old will pay a premium of RS 46,931 every year. Over 20 years, the returns from the policy will be just 0.66%.

To improve that return, you need to search for a similar policy either with a lower premium or with an increased sum assured. However, do not include the non-guaranteed bonuses in your calculation, a key feature of most traditional plans. Non-guaranteed bonuses are at the discretion of the insurer. However, once a bonus is declared, it is guaranteed.

As a basic filter, look at the guaranteed benefits given in the policy illustrations. Says Akshay Mehrotra, chief marketing officer, Policybazaar.com, “when comparing a traditional plan, look at the guaranteed benefits on death, maturity and surrender. Do not get taken in by the advertised benefits because they can also include non-guaranteed bonuses.”

Ulips: Compared with traditional plans, Ulips are more transparent. In traditional plans you pick a sum assured and the insurer tells you the premium amount. But in case of Ulips, you can choose the premium and the sum assured. The minimum sum assured that one can choose according to the regulatory guidelines is 10 times the premium paid or half the term multiplied by the annual premium, whichever is higher. So, for an annual premium of ₹ 1 lakh for a 20-year term, the minimum sum assured that one can choose is ₹ 10 lakh. If you extend the term to 30 years, the minimum sum assured becomes ₹ 15 lakh. The maximum sum assured varies from insurer to insurer but the maximum multiple is usually same as the policy term.

There are typically four kinds of costs that are deducted every year from the premiums you pay. The first is the premium allocation charge which is a straight deduction from the premium before any money is invested. Subsequently, a mortality cost or the cost of insurance, policy administration charge and the fund management charge get deducted.

How these costs affect your investments can be seen from the policy benefit illustration.

Depending upon the premiums, sum assured and the fund you choose, agents will show a customized illustration which will show how these costs impact returns. Additionally, the illustration also needs to factor in other costs such as the service tax or a charge that may be deducted on account of a guarantee. The illustrations are currently allowed to assume two rates of return: 6% on the conservative side and 10% on the aggressive side.

The illustration will show you the fund value at the end of every year assuming both rates for illustration. Additionally, the illustration will also show you the net yield. So if the net yield of a policy is, say, 8.70% when the assumed rate of growth of the fund is 10%, it means the difference of 1.30 percentage points is due to the cost of the policy.

Ideally one should compare the net yield across similar policies but the published net yields may not be a true reflection of the rate of return. This is because the regulator has allowed the insurers to exclude costs such as mortality costs, service tax and any charge on account of a guarantee while calculating the net yield.

While some insurers take an extra step to illustrate the actual return on your investment, many insurers will just stop at disclosing the net yield.

For now, there is no standard format, which will factor in all costs to give you the actual yield on your investment. In the absence of it, compare the fund value on maturity. Fund value takes into account all the costs. Given the availability of so much information, do your due diligence before selecting a policy.

deepti.bh@livemint.com