Understanding the 3 Key Broad Categories of Insurance Products

The first question that might cross your mind while purchasing an insurance product would be about the return you’re expecting. But is it prudent to always expect return while buying insurance? Along with the answer to this question, this article will also shed some light upon when one should pick a term insurance over other return-offering insurance products.

To begin with, insurance products fall into three key broad categories:

·         Pure risk cover

·         Pure savings

·         Savings and risk cover

The purpose, nature and benefits of each of these categories are significantly different.

1. Insurance Products Providing Pure Risk Cover

Products that provide pure risk cover would generally include term or health insurance. For a specified premium, the policyholder can be covered for events such as death, critical illness, accidents hospitalisation, disability etc.

Normally, with such products, there is no maturity benefit associated with the policy. The policy will only make a payment to the policyholder when the specified event occurs. While this might also mean that a lot of policyholders may not receive the payment, they along with their families are provided valuable financial protection in the event of an unfortunate occurring of a claim.

For those policies, where a claim does occur the payment made is normally many multiples of the premiums that have been paid. For instance, a protection plan of Rs 2508 annually (exclusive of service tax and educational cess) could help provide a financial cushion of up to Rs 10 Lakhs in the event of death of the policyholder (example based on a male policyholder aged 25 years, with a 25 year term).

No investment product can provide the same level of benefit for a similar level of premium.

These are insurance products in their purest form i.e. they are designed and priced so that the policyholders, as a group, are effectively pooling their premiums in order to pay a benefit for a relatively infrequent, but significant event that might occur. This means that for each policyholder the cost of providing the cover is relatively modest in comparison to the benefit that would be provided if that event arises.

2. Pure Savings Insurance Products

Pure savings products are just the opposite of pure risk cover insurance products. These policies are designed to help the individual accumulate a fund or corpus that can be used at some later point. Various variants of these contracts exist; for some policies such as unit-linked policies, the selection of the type of investment, which is made, is in the hands of the policyholder, whereas for others (e.g. traditional policies), the investments are decided by the insurer.

When considering a pure savings product, the ultimate return is an important consideration, but this must be balanced against the level of risk associated with the investments. Risk is the potential variability in the return ultimately achieved on the investments — a high risk investment may have the potential to deliver a very high return, but potentially it could also deliver a negative return. However, a fund investing in short-term fixed interest securities may have a relatively low return, but much higher levels of predictability over the level of return that will be achieved.

Other important factors to consider for an investment product are:

·         The level of charges

·         Performance and ability of the insurance company's fund managers

·         Flexibility

·         Level of guarantees

3. Products with a Combination of Savings and Risk Coverage

The third kind of insurance products act as both risk cover and well as saving elements. The Investment Insurance to the policyholder is based on the investment returns earned on the investment’s net of the cost of providing the risk coverage. For a given underlying investment, these products will generate lower net returns than a pure investment product because some of the premiums or funds have been utilized to pay for the risk coverage. One such policy available online in India is Invest Plan.

Ultimately, each policyholder should assess their requirements, needs and the amount of income that they are willing to invest, before deciding on which type of insurance product to purchase. If the requirements are for a high level of risk protection at a relatively low premium, then pure protection products are normally the most appropriate product. These products are relatively straightforward and the price can be compared easily across companies. Insurance companies have a full suite of products to cater to every need of a customer.

The selection of an appropriate product to buy can often be a complex task and therefore the advice, knowledge and guidance of an experienced financial consultant can often be invaluable in selecting what is the right product for you.