Life Insurance

4 Questions you should ask a financial agent before buying Traditional Life Insurance

by SMCIB on Wednesday, 12 October 2022

Before purchasing any product, like say a smartphone, refrigerator, or laptop, you will obviously conduct thorough research, assess the product, etc. If you have any questions about how the product functions or how a certain feature works, you will ask the seller. You will understand everything, and proceed with the purchase only if the product meets your requirements. Right?

Similarly, while buying traditional life insurance products such as an Endowment Plan, Guaranteed Income Plan, etc. it is important that you research and understand the T&Cs involved. Such life insurance policies are long-term commitments. Hence, before you buy them, you must enquire about how much money you will have to invest, how long you will need to invest it, the returns you will get, etc. And, only if you are certain that the policy meets your needs, should you go ahead.

In this article, we discuss some important questions you should ask your financial agent before buying traditional life insurance policies. So, let’s begin!

Questions To Ask A Financial Agent Before Buying Traditional Life Insurance

  1. What is the minimum number of years I need to make the premium payment?

    When you buy a life insurance plan, the insurance company will offer you a cover in exchange for a premium amount. To keep the policy active, you will need to commit to investing the same premium on a regular basis for a set number of years. In case you plan to drop out or stop paying the premiums, you may lose the returns promised by the insurance company.

    So, before you buy a traditional life insurance policy, ask your financial agent about the minimum number of years for which you would be required to make premium payments. This will give you an idea of how much you will need to pay and for how long you will need to pay, allowing you to plan your finances accordingly.

  2. What is the minimum number of years before I can withdraw this investment?

    When you invest in traditional life insurance plans like an Endowment Plan or a Guaranteed Income Plan, your money is locked in (held) for a fixed period of time. This means that you won’t be able to withdraw your money for a specific number of years. As a result, it is critical to understand how long you will be unable to withdraw your invested money. Enquire with your financial agent about this.

    Remember, investing in a traditional life insurance policy is a significant decision. To avoid any issues later on, make sure you buy it after a lot of deliberation, and understand all the nitty-gritties before going ahead.

  3. What are the implications of premature withdrawal?

    You invest in a traditional life insurance plan thinking it will help meet your financial goals like saving for your daughter’s wedding, your retirement, etc. However, there can come a time when you may need to exit or surrender the plan before the maturity date due to unavoidable circumstances - maybe you are not able to afford the premiums or discover another investment option where you are getting better returns.

    You cannot make premature withdrawals in traditional life plans without losing a substantial percentage of the principal amount you invest. Hence, it is crucial to know how exits work in the policy you intend to buy. You need to be aware of the consequences if you stop paying the premiums after you make the purchase.

    So, ask your financial agent about the implications of premature withdrawal. Will the policy lapse if you stop paying the premium? Will you get a chance to revive or continue the policy after it lapses? If yes, what is the process involved? Will you have to pay any penalty? Because life insurance is a long-term commitment, be sure you understand the policy's terms and conditions carefully before proceeding.

  4. What is the IRR for the plan you are recommending I should buy? How does it compare with investment in NPS, FD, and Mutual funds?

    Before making any investment, it is critical to understand the exact returns you will receive. For this, you can ask your financial agent to calculate the investment’s Internal Rate of Return (IRR). The IRR is a financial metric that indicates the profitability of your investment. In general, the higher the IRR, the better your investment.

    You can also ask your financial agent to calculate the IRR for other financial instruments such as NPS (National Pension Scheme), FD (Fixed Deposit), Mutual Funds, and so on. You can then compare the returns you will be getting if you invest in traditional life plans with the returns you will receive in these instruments.

    You need to be comfortable with the return you will receive for the investment you are planning to make. So, make sure you go ahead with the investment in traditional life insurance policies only if you are satisfied with the returns.

So, these are four questions you should definitely ask your financial agent before you invest in a traditional life insurance policy. Make sure you completely understand the terms and conditions of the policy you choose before going ahead - to avoid any issues later.

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