Don’t switch life policies too often

The Insurance Regulatory and  Development Authority of India (IRDAI) recently revealed statistics about India’s Persistency Ratio in life insurance products. The numbers leave much to be desired.

Persistency Ratio (PR) refers to the percentage of total policies that an insurance provider retains in a year. As per IRDAI’s statistics for 2015-16, the average industry PR for the 13th month was 61 per cent. This means that out of the hundred customers acquired in a year, only 61 renewed their policies the following year. The PR for the 61st month is worse: Two-thirds of life insurance providers retained less than a third of their customers.

Why should you-a customer or a life policy holder-care about these numbers? Here’s why.

Life insurance is a long-term financial instrument that must be purchased after due diligence about the product as well as your own financial requirements. Failing on these two counts could lead you to buying products unsuited to your needs and this can have terrible consequences. Let’s explore them here.

Cover Dumped, Family At Risk
A life insurance cover is meant to protect your dependents from the financial hardships that will be brought on by your untimely death. There may be various reasons for exiting your life cover, ranging from flimsy ones to well-reasoned ones. However, if you have dependents, at no point should you go without a life cover. Before you exit one life cover, make sure you have already purchased another, adequate-sized life cover and have completed its mandatory waiting periods.

Accrued Benefits Lost
Most life plans have benefits that acc-rue over their ten-ure. Endo-wment plans or Ulips may have investment benefits, bonuses, and waiver of charges. You also claim tax deductions under Section 80C against your premiums. There is the three-year-rule, which implies that any claims made on a life insurance policy maintained without break for three years must be honoured without question by the insurer.

When you dump a policy, you may lose the investment benefits. Surrendering an endowment plan within two years of its start, or a Ulip five years from its commencement would lead to a reversal of the tax benefits you have claimed on them. As for the three-year rule, you will have to start this afresh each time you buy a new policy, putting your dependents at risk.

New Policy = Higher Premiums
The premiums that you pay towards your life insurance are linked to your age. A policy bought in your 20s and maintained without break would have the same premium costs in your 40s. But a new policy bought at a later age could cost you much higher. If you frequently dump policies to buy new ones, your premium costs will keep escalating over the decades. It is advisable to take stock of your family’s money needs early in life, and buy a life cover that you would be able to maintain into the long-term future.

Buying Life Cover For The Wrong Reasons
This is a widespread problem. Life insurance is often equated with investments and tax-saving. And often, it is purchased in a hurry towards the end of the financial year. In your hurry, you fail to research or understand your insurance, investment and tax-saving needs adequately. It is also likely that you are hard-sold a bad product by an agent. Resultantly, when you wise up, you dump the product. It is absolutely important that life covers are bought to, first and foremost, cover your life risks adequately. If you are buying the life cover for any other reason, please rethink. There are smarter investment and tax-saving avenues such as PPF, mutual funds, and ELSS.

Overall Lack Of Financial Awareness
If you have been frequently buying life covers that you don’t maintain for the long term, it reflects on your overall lack of financial awareness and planning. It reveals that you are not insuring and investing properly, and that you need to keep chopping and changing your plans.

In such a case, it is advisable for you to seek out an investment advisor to help you chalk a realistic money plan. Taking this advice would not help you curb bad money decisions, it would also help you invest and insure better, thus ensuring wealth creation as well as security from the unforeseen.

The writer is the CEO of BankBazaar.com