Criteria to evaluate various life insurance products

When an investment adviser assesses a life insurance product, the first step is to list the parameters that affect both the protection and the investment component. The most common parameters are coverage (sum assured), premium amount and payment frequency, policy term, claim settlement ratio, surrender value, tax benefits, and optional riders.

Each parameter carries a different weight depending on the client’s age, income, risk appetite and financial goals. For example, a young professional looking for pure protection will prioritize a high coverage‑to‑premium ratio and a strong claim settlement record, whereas a retiree may value liquidity and tax efficiency more.

Exam questions often present a client profile and ask which parameter should be examined first, or they may give a table of product features and ask you to identify the most suitable product. Remember to map the client’s objective to the relevant criteria before answering.

• Coverage – determines the protection amount.
• Premium – affects affordability and cash‑flow planning.
• Liquidity – important for early withdrawals or surrender.

The sum assured is the amount the insurer promises to pay on death or maturity, subject to policy terms. For pure term plans, the sum assured is the only benefit, while for endowment or ULIP plans it co‑exists with a savings component.

When comparing policies, look at the ratio of sum assured to annual premium (coverage ratio). A higher ratio indicates better protection per rupee spent. However, a very high ratio may come with restrictive policy terms or limited riders.

Exam tip: Do not confuse the sum assured with the maturity benefit in participating policies; the latter may be higher due to bonuses or fund performance.

Premiums can be paid annually, semi‑annually, quarterly or monthly. The frequency influences the total outflow because insurers add a loading for more frequent payments.

For evaluation, calculate the annualised premium – the total premium paid in a year regardless of payment mode. This helps compare policies on a like‑for‑like basis.

Exam relevance: A question may give monthly premium figures for two policies and ask which one is cheaper on an annual basis. Convert the monthly amount to annual by multiplying by 12 and adding the applicable loading if mentioned.

Policy term is the duration for which coverage is provided. Term insurance typically matches the client’s income‑earning period, while endowment and ULIP policies have a fixed maturity date that may be longer than the protection need.

Shorter terms reduce total premium outgo but also limit the chance to build cash value. Longer terms increase the chance of higher surrender value but also raise the total premium paid.

Exam focus: You may be asked to select the appropriate term for a 30‑year‑old with a 20‑year mortgage. The correct answer will align the policy term with the mortgage tenure, ensuring coverage until the loan is cleared.

Surrender value is the amount payable to the policyholder if the contract is terminated before maturity. It is typically a percentage of the accrued cash value, decreasing in the early years of the policy.

Liquidity is crucial for clients who may need early access to funds. Evaluate the free‑look period (usually 15 days) and the surrender charge schedule. A lower surrender charge after the first 3‑5 years is preferable for investors with medium‑term horizons.

Exam scenario: You may be asked to choose between two ULIP plans where one offers a higher surrender value after year 5. The correct answer will be the plan with the higher post‑year‑5 surrender value, assuming other factors are equal.

Premiums paid for life insurance qualify for deduction under Section 80C up to ₹1.5 lakh per annum. Additionally, the death benefit is tax‑free under Section 10(10D) for policies issued after 1 April 2012, provided the sum assured does not exceed 10 times the annual premium.

When evaluating products, check whether the policy meets the 10× rule. ULIP policies often exceed this limit, making the death benefit partially taxable.

Exam relevance: A multiple‑choice question may present two policies and ask which one offers full tax exemption on the death benefit. Apply the 10× rule to determine the correct answer.

Riders such as accidental death benefit, critical illness, waiver of premium, and term‑to‑term conversion enhance the base policy. While they increase protection, they also raise the overall premium.

Evaluate riders based on the client’s risk profile. For a high‑risk profession, an accidental death rider may be essential, whereas a critical illness rider is valuable for middle‑aged clients with family health concerns.

Exam tip: Questions often ask which rider is mandatory for a ULIP to qualify for tax exemption. The answer is the “critical illness rider” is not mandatory; only the base policy must satisfy the 10× rule.