Personal Finance: Why Buy A Policy

PERSONAL FINANCE: INSURANCE
Why Buy A Policy

Six questions you wanted to ask about buying policies but never dared to ask.

By Shilpa Nayak

With two private sector insurance companies-HDFC Standard Life and ICICI Prudential-kicking off operations, competition in the life insurance sector will hot up. But what exactly are the new players going to offer consumers? And, more important, why buy insurance? BT provides answers to FAQs on life insurance.

Q. Is an insurance policy an investment?

A. No way. Insurance is a cover for life and assets and should never be construed as an investment. True, in India insurance has been perceived as a tax-saving tool or a savings instrument, but that is a result of the way it has been sold in the country. Says Saugata Gupta, Head (Marketing), ICICI Pru: ''We plan to change the way people approach insurance through a combination of consumer education, communication driving attitudinal change, and need-based selling.''

What products should you buy?

Before you decide on buying an insurance policy, figure out what you need it for. Once you prioritise your needs, you can start looking for the right product. Private insurers could help you make the right decision. Says Deepak Satwalekar, CEO, HDFC Standard Life: ''We start by calling the people who sell our policies consultants, and not agents. The consultant will have the direct ownership of the client. As the market grows, products will get more complicated. Unless the intermediary understands the products, it's not going to benefit the customer.''

Once you buy a life insurance policy, should you review it?

Most people buy policies early on in life and then, except for paying the premium each year, forget about it. That's not how insurance products should be used. You need a constant revenue stream for your dependents.

When you move up in life, you have got to add up to your insurance because the needs of your dependents are likely to increase as your income grows. That's how insurance products work abroad.

Can insurance be a source of income?

No it can't. It's best to regard insurance as an outgo. Thus, you should prefer low premium products that offer the maximum cover. Investing in insurance products in order to get a lumpsum return at maturity is a mistake. If that's what you are looking at, you should be investing in bonds and other fixed-income instruments.

What products are the new entrants offering?

The kind of products offered by both HDFC Standard Life and ICICI Pru are similar to that of LIC, though limited in numbers. The most popular term assurance, endowment and money back products are on offer (See What's On Offer). However, private insurance products offer additional benefits for critical illness, accident, or disability. Though there are minor advantages in the way some private insurance products are designed versus others, they are, by and large, comparable both in terms of flexibility and the cost. Take for example ICICI Pru's Cashbak product (similar to LIC's popular money back policy), which has a survival benefit every three years instead of four or five years that others have. ''Our consumer insights have helped us offer some very beneficial product features,'' says ICICI Pru's Gupta.

What else do the new players offer?

Service. Consumers will not only get more innovative and flexible products that cater to their specific needs, but also better service. ''We'll be there with the product that a consumer wants at the time and place of his convenience,'' proclaims Satwalekar. Echoes Gupta: ''Our service levels will be benchmarked to the best in the retail finance sector as well as other ICICI retail product offerings. We have invested in technology to achieve these service levels, and our documentation and our grievance handling would meet these benchmarks.''

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