How many are enough?

How many are enough?

The more life covers you have, the tougher they are to manage. A smart investor buys a term cover for life insurance and invests in funds independently. But for those who cannot, Ulips are the best bets

by Sunil Dhawan for Outlook Money

Consider the following grim statistics. Almost eight of every 10 Indians are without any kind of life or health insurance. But the irony is that even those with insurance policies, especially life covers, maybe underinsured.

On the other hand, there are individuals who have bought insurance policies for the sake of investment only. Take the case of 38-year-old Minoti Desai, a former member of the Indian women’s cricket team, who is now self-employed. She has 23 life insurance policies, mostly money-back, endowment and Ulips (unit-linked insurance plans) with a total life cover of Rs 40 lakh and an annual premium of Rs 3.4 lakh. She can have the same cover at a premium of about Rs 21,000 in a term plan till age 65, a life insurance plan that only provides your dependents with the sum insured during the tenure of the policy and not returns. The remaining annual contribution could have been invested in a range of pure investment products ranging from low-risk products like public provident fund to high-risk investments such as equity mutual funds (MFs). This combination provides higher cover as well as higher returns.

Why people have too many policies. There are many like Desai who have a portfolio of insurance policies much like a portfolio of MFs. Much of it has been because putting their money in traditional products such as endowment and money-back, has been their preferred investment. “I have been buying traditional plans almost every year for the last 13 years. It keeps a check on my spendthrift ways and helps me save money,” says Desai.

Since traditional products didn’t have the flexibility to adjust to changes in one’s life, such as the need for enhanced cover after the birth of a child, people had to buy fresh policies. There are other reasons as well. Insurance was sold as a tax-saving option and access to it was relatively better, thanks to a larger number of insurance agents as compared to, say, MF agents. Many people treated insurance products as the only investment tool to achieve life’s goals, such as children’s education and retirement.

Problem of plenty. A pile of policies comes with a pile of problems. To name a few, it may be difficult to keep track of premiums, updating nominations and maturing policies even if your agent is helpful. Since you are committed to premium payments, you remain vulnerable if your commitments are large, especially in exceptional times, such as a job loss, or when you want to take a sabbatical without pay. The other major problem arises when you realise that your agent has sold you a policy whose features don’t fit your needs and even the returns are not endearing. Life insurance policies being long-term contracts, the exit costs are high (see The Right Policy: Pick Live Covers, Drop Dead Ones, 15 January), which forces one to stay put.

How Ulips can prevent pile-up. For those who can’t actively track and manage investments and would like to rely on investment-cum-risk insurance products, Ulips are an alternative to holding large number of policies. You can buy a Ulip that ensures adequate insurance cover, gives flexibility in premium payments, and has a decent fund performance. You can even attach a critical illness and a disability rider. This way you could cover a lot of risks in a single policy. More savings can happen in the same Ulip through top-ups. Thanks to this flexibility and hardsell by agents, Ulips have become popular. “I have almost stopped buying traditional plans since 2001; now my insurance pie also features Ulips,” says Desai. If you want greater risk cover or find the premium unmanageable, you can even rely on a combination of a low-premium, high-life cover term plan along with a Ulip.

Even as you search for the best Ulip, you need to be on your guard. This product is meant for long-term investment, since much of administration and other costs are levied in the initial years of the policy term. However, unscrupulous agents have been hawking Ulips to those looking to park money in equity-related instruments and getting them. There have been instances where new Ulips have been sold to the same customer just because the insurer has launched a new fund option at a lower net asset value. Worse, some agents, after having switched insurers, urge policyholders to exit existing Ulips to buy newly launched ones by their new companies. Therefore, zeroing down to the right agent is essential (see Finding The Right Partner, 15 September). Also, check whether the exit costs of the Ulip are manageable.

How many policies should you have? “There is no thumb rule for the number of policies that one should buy,” says Debashis Sarkar, director (marketing), Max New York Life Insurance. Opt for Ulips that give both the sum assured and fund value as death benefit, instead of those that provide the higher of the two. Choose Ulips that offer life cover till age 100. You can increase or decrease the cover whenever the need arises. A periodic review of life risk cover also helps. “Do a ‘needs analysis’ at periodic intervals; it may so happen that one of your risks may increase or decrease and your calculation may change completely,” says Anand Pejawar, country head, Bancassurance, SBI Life Insurance.

What do you do if you have already accumulated a pile of policies that you might now want to reduce? In Ulips, you need to stay invested for the long-term, given the commonly front-loaded cost structure. For traditional plans, depending on exit penalties, you could take a call to minimise your losses. Buying life covers is all about knowing how much cover you need and figuring out when it is enough. The good news is that with the ever-expanding choice in insurance-cum-investment options, you can actually strike a balance.