“My financial advisor is working very hard towards building a retirement plan… It involves my money and his retirement!”
In the realm of astonishment, nothing comes closer to the norm that seemingly prevails in the buying behaviour related to financial products like insurance and long term investments. More often than not, we rely almost completely on the advice of another person and/or an institution to tell us what is best for us. After all, who has the time to struggle with the whole gamut of complicated concepts on which financial products are built!
What we miss out completely on is the fact that the person we are relying on to provide us with the best advice may or may not be guided by our best interest. In today’s day and age of easily available information, it is important to break the myth that you can’t work your way through choosing an investment or insurance option on your own.
Let us take the example of life insurance. There are enough and more categories of products doing the rounds, not to mention the number of product options available in each of these categories. For as long as one can remember, life insurance products have been bought primarily to exhaust the tax exemption limit associated with the purchase of these products. Most people therefore, end up buying a product that qualifies for such tax exemption without even making an effort to understand whether the product category is relevant to their needs and requirements.
Life insurance products can broadly be categorised as being:
1. Protection oriented policies: These products are primarily designed to cover the life of the insured and provide for a lump-sum benefit in case the life insured dies. Such products are generally referred to as ‘Term’ plans. Some key characteristics of ‘Term’ plans can be summarised as:
- Lump-sum benefit paid to designated beneficiaries only in the event of the policyholder’s death
- You can get a high insurance cover for fairly low premiums but no payments are made by the insurer if the policyholder is alive when the policy completes its term
- If the policyholder stops paying the premiums when due at any time during the term of the policy, the policy ceases to have any value
2. Investment / Savings oriented policies: These products, while providing for life insurance, primarily facilitate the growth of capital on premiums paid by the policy owner. Some key characteristics of these plans can be summarised as:
- These products are primarily savings plans with attached life insurance
- Part of the premiums paid by the policyholder are treated as savings while the remaining amount is used to buy life insurance
- The policy will pay a lump-sum in case the policyholder dies during the term of the policy or will pay out the amounts saved if the policyholder is alive when the policy expires
- The premiums associated with these plans are higher for a given amount of insurance cover. This is because a large part of the premium is being treated as savings and only a portion being utilised to buy life insurance
Investments / Savings oriented products can further be classified as being Traditional Plans or Unit Linked Plans.
The insurance type that best meets your requirements is largely dependent on the need you are trying to fulfil. If securing your family’s financial future is the primary need, then you should actively consider a ‘Term’ plan. From a level of importance perspective, this need is the one that you should make sure is taken care of at the earliest. If however, there is already adequate financial protection available for your dependents and your primary need is long term savings for capital appreciation and / or conservation, available options under savings oriented plans should be considered.
Most of us end up buying a high premium savings plan with a low insurance cover when we don’t even have adequate risk cover or vice versa. Even if investing in the right category, we rarely do enough research of our own before choosing a given product.
You need to help yourself. Be informed. Seek information. Find out and find out more about the financial world around you. Don’t be afraid to ask questions, clarify your doubts. Get to know the basics. Information is no longer difficult to obtain in today’s age. Read up more about concepts like diversification, capital appreciation, asset allocation, insurance, long term savings and the like. If you don’t learn how to manage your own money early, you will always be dependent on others who may or may not be guided by your best interests.
This is not to undermine the role of financial advisors or distributors in any way. They play a very important role in reaching out to customers and making products and related information available to customers. The point is to know enough to ensure that you can differentiate between genuine advice as opposed to a play on words and misinformation!