Step by Step Process of Buying Life Insurance

Have you already bought Life Insurance ? Though you might have done the sin of being underinsured, I would say its fine, because today we are going to look at detailed steps of buying Life Insurance and we will also learn a lot of things.  Almost everyone has his own set of doubts regarding Life Insurance contracts, but in this article we will not just look at detailed procedure of buying Life Insurance, but also see why most of the people have the doubts which they have. This is probably going to be the last article on Life Insurance you would need. So here we go. Today for the savvy life insurance buyer, it is possible to buy the policy on the web – it saves money for sure.

Choose company that suits you

The first step in buying Term insurance is to shortlist the company from where you wish to buy the product. There are many companies in India selling life insurance and almost all of them have a Term cover available. Let us call them companies A to M. If you do not TRUST say five of those companies – or you do not believe that you wish to deal with them, you need not even look at them. Why you dont like Term Insurance and why you are wrong !

Inquire about insurance cost

Now let us say you like to deal only with A, D, F, G and H. Visit these companies’ websites and find out how much a term insurance for you costs. If you are 35 – look for a policy that will protect YOUR INCOME till the age of say 55 years (choosing age 65 will increase the premium) if your retirement age is 55. However, if you think you will be earning till the age of 65 years, choose a 30-year plan.

Formalities to fulfill

If you are savvy and patient enough, you could fill up the form online – and a person will get in touch for the formalities. Or you could call up and ask for an agent. On an average the agent will not be very well qualified – but most of them will try to dissuade you from buying a term insurance. Just say, ‘give me a term insurance form’. There will be other documentation like income proof (3 years IT return), one photograph, pan card etc.

Filling the form

Next is the process of filling the form. This is one crucial thing that people are normally too lazy to do – so they delegate it to the agent. The life insurance form, the medical insurance form and the embarkation form when you are landing in the US or Israel should always be filled by you personally! You know about yourself – not the agent whom you have just met. Many of them are worried that you will not be eligible to be insured. So in order to protect their commission (and to please you) will take short cuts, be careful.

Fill details accurately

Every word, every column in the life insurance form is crucial – that is the reason why they are there in the form. All details should be accurately filled. Make sure that the name in your passport, pan card and the life insurance form are EXACTLY the same. To the authorities K Balakrishnan is not the same as Balakrishnan Kumar. It may sound trivial, but let me assure you your nominee will not find it amusing.

Besides, check your height, weight (I have seen some agents argue with the doctor to show a few kilograms less and some doctors oblige!), number of cigarettes you smoke, the amount of alcohol you drink, parents illnesses before they were 65, and also your own medical history.

Faith binds customer, insurer

Let us start from the very beginning. The Life insurance form that you are filling in is called a ‘Proposal form’ – which means you are proposing that you want a life insurance cover. Life insurance business is based on utmost good faith. The Latin word for utmost good faith is Uberrimae Fidei – which means you (the applicant) is under a basic duty to disclose all material facts and surrounding circumstances that could influence the decision of the other party (the insurance company) to enter the agreement. Non-disclosure or a partial-disclosure makes such agreements voidable – the insurance company can choose to ignore it, but they have a right to cancel the contract.

As per the contract, you are proposing and giving all your details that are asked for in the form. This includes your age, height, weight, your smoking and alcohol consumption habits.

Be Truthful

You should be truthful because of two reasons – one it is necessary to be truthful. The second perhaps the more important reason is when you are not truthful and you were to die, your nominee will not get any money. If a person has taken a policy just say 8 months before the claim happens, there is almost a 100 per cent chance that the claim will be investigated. Here the company literally looks at the application with a fine comb and anything that has not been correctly stated will be used against the claimant. If for example, a person dies in a road accident – and what has been hidden was say blood pressure – Insurance companies have said ‘his blood pressure may have caused him some inconvenience while crossing the road…’

Think about your nominee

One very important thing which most life insurance buyers forget is that by lying on the proposal form they are telling a lie to their nominee, not to the life insurance company! If on death the claim amount is not paid (IMMEDIATELY), it is almost like the policy did not exist.

Cross-check copy of application form

Apart from the critical questions, there are some other questions like caste, spouse’s name, spouse’s occupation and children’s names, especially if the nominee is more than one person. When the company issues a policy, they are bound to send you a copy of the application form – please check whether it is the same form which you had filled. A while ago I heard of a case where the agent had changed the form – and removed the illness clauses before submitting the application to the company. As the case involved an employee of the company – the critical illness claim was paid without a murmur. What helped was the fact that the client had kept a copy of the application!

Take your time

Please remember even if you are paying a small premium (term premiums are not large), the sum assured is normally a critical amount and your dependants are waiting for that cheque to carry on their lives. It is quite all right for a person to spend some more time while taking a policy but any delay at the time of claim settlement is bound to unnerve the dependants.

Everything that you say in the form – your job, income, past illnesses are all critical to the whole process of underwriting of your policy. The life insurance company also collects data – if it finds that a certain occupation is prone to a particular type of illness, they may ask you to go through some more tests before they issue a policy.

Understand the contract

There is a big difference between a mutual fund ‘investment’ and a ‘life-insurance’ contract. In case of a mutual fund, the asset management company is making an ‘Offer’ to you. This means if you issue a valid cheque, units will be allotted to you. They are making the offer, and you are accepting.

In case of an insurance contract, you are ‘Proposing’ saying that you want life insurance. If your cheque goes through, then the life insurance company calls you for a financial and a medical underwriting process. If they are satisfied that your life is a normal life, they will issue you a policy. Once a policy is issued by the company it means you have a contract that is binding. On you the liability is to pay the premium regularly, and on them is a duty that in case of death, they should pay the sum assured amount to the nominee. This is critical and a very important contract which you should understand reasonably well.

Conclusion

Life Insurance is an important decision in life and each step in this whole process is critical to make the whole decision successful and free of any hassles later. Lets look at the whole steps once again through the diagram.

process of buying life insurance

(This article appeared on moneymantra.co.in and has been republished on this blog with their permission. The article is written by PV Subramanyam who also blogs at www.subramoney.com)

97 CommentsAdd Comment

  1. nisha

    Thanks @Manish Chouhan, Muthu Krishnan V, AJ.
    As you said, any effort is worth it as the insurance amount would now mean a new life for them. I’ll ask her to work in that direction. Hope she gets lucky with that!
    Once again, thanks to you all.
    Regards,
    Nisha

  2. nisha

    This is for a friend of mine who lost her husband about an year back. She knows he had a life insurance policy worth a few lakhs which would be a blessing in her present financial condition. But the issue is that she doesn’t know the policy details, not even the provider name and the scheme.

    It is certain that she is the nominee, but she has no documents of the policy. Is there any way she can get it? Could there be a central database from where she can find out the policy number, provider and scheme?

    Hoping to hear from you,
    Regards,
    Nisha

  3. himanshu

    It seems people over 32 -35 year are more taking term insurance.but i am 27 year old so thinking weather it will be any beneficial ? rather than taking on 32- 35 years.

    • Muthu Krishnan V

      god forbid, you contract some illness/disease, insurance companies may not be willing to provide insurance for certain types. better to take insurance when one is young and healthy.

  4. Sandeep Awasthi

    Hi Manish,
    I like your comments very much. you doing a great job for all of us.

    I need a advice from you.

    I’m 28 yrs old and I want to take a 15 lakh term insurance for 25 years.
    which is better for me in followings criteria (Goods Service & Premium):-
    1-Kotak
    2-HDFC
    3-Aviva (minimum S.A. 25 lakh)
    4-India First

    Awaiting your prompt valuble reply.

    regards
    Sandeep Awasthi

  5. vikram

    Hi,

    This is not reg. life insurance but general insurance. I came to know that we can select our options to be covered in the insurance policy and get rid of unused ones, there by reducing premiums.

    Any updates from your side

  6. Wriju Bharadwaj

    Hi Manish,

    I like your site, a lot of useful info. I need a bit of advice from you.

    I’m 30 yrs old and I had LIC Jeevan Anand Policy for 20 yrs 3 years ago (premium a little less than Rs.49K p.a.). Now I know how you feel about endowment plans, but just hear me out.
    For further investment
    I want to take out a term plan along which would provide a cover of say 1 Cr. (approx premium 7-8k p.a.)
    +
    I would like to invest in PPF, I plan to start with around 48k p.a. for now and would later on increase the amount as and when my salary goes up.

    Later on when the PPF matures I plan to open FD with part of the matured sum.

    My goal is to secure my family (wife + 2 kids) in the future, whether I survive for a long period or not. In other words I’m trying to chalk out a win-win plan.

    Do you think I’m headed in the right direction

    or am I digging my own grave?

    Please advise (be brutal if needed)…
    Thanks

      • Wriju Bharadwaj

        Hi Manish,

        Thanks for the reply…

        I’ll explore my options of converting the LIC into a paid up policy and maybe put a larger sum inPPF (not that I have much faith but lets hope the govt. doesn’t drop rates for PPF)

        Thanks for the advice again….

        Wriju

  7. Vivek Rawat

    HI Manish

    Its been 2-3 months that i have been reading articles from your website. and I must compliment you and your team for such a great job.

    These days, whenever i have some doubt regarding any investment options or insurance, i tried to find articles in your website and usually find 3-4 articles which complete erase every doubts I have.

    Reading your articles only had helped me to realise how important is a Term Plan.

    I will be taking a term plan by this month and i have selected HDFC Life CLICK 2 PROTECT plan.

    and BTW.. I bought book written by you.. ” JAGO INVESTOR”.. ..these days just going through it.

    Regards
    Vivek Rawat

    • samrat roy

      Manish Bhai,
      are you sure that he does not need to disclose his changed habits of smoking and drinking? I doubt. Because an Insured is supposed to intimate even the minutest detail, like change in telephone no, though the reason is different altogether. But an Insured is supposed to get himself updated with the Insurer. If at the time of Claim, the Insurer finds out that the Insured had died of ,say, Lung Cancer due to his excessive smoking habits which he has grown up lately; but the Insured has declared that He is a non smoker; would they settle the Claim? I Doubt. Same goes if the Insured has become involved with a more hazardous profession during the Policy Tenure. Please correct me if I am wrong. Please reply……….

  8. BKM

    Hi Manish,
    This site is the place where I can find the facts not never disclosed by convincing ads of financial products, Agents, Fund houses!! Current archive of articles are excellent for financial literacy (also keeping cheaters away) for non finance people like us. In some articles discussions at the end became equally rich as the article. Thanks for your effort.

    Let me clarify something from you about term policy:

    Q1> I got term policy on 2005. Then I was not a smoker, didn’t take alcohol. After 2007 I developed the habit for both. Should I need to inform the insurer? Will they revise the premium then?

    Q2> On 2005 my employer were hazardous chemical makers. My agent declared the same. So it must have some loading effect in premium. Now I am working for IT industry. Should I inform the same to my insurer? Will that reduce my premium?

    Q3> Now I am planning another term policy from same insurer. This time I am going to fill up the form myself and disclose all the facts(credit goes to your advice of being honest with insurance company). But in that case work-place, smoking-alcohol habit will be contradictory declaration if compared with my previous policy (or may be not as I signed the form with date then and on that date those facts were true). Please clarify.

    Q4> What is the procedure for getting the copy of application form. Because with application form I didn’t get any?

    Q5> Why insurance company hides the calculation of final premium. May the are complicated. But common man goes through same degree of complicated information in any IPO/MF/Right issue forms and got habituated with them. Basically those calculations should be a risk quantification process plus some profit/charges for the company. If nothing is fishy why they don’t declare it ? or may be they are waiting for IRDA to make them do it!!

    Please clarify these five questions separately and if possible with links of relevant IRDA/company practices.

    BKM

    • BKM

      1. NO you didnt need to inform anyone

      2. NO , they will not reduce it , the better thing would be to close the old policy and take a new one , check if the premiums today are lower than your current premium or not

      3. No , it does not matter .. you always give declaration as per today terms . it would be different from old policy , but thats ok .

      4. Which application form ? Ask from agent

      5. they dont declare it becasue you will never understand it . its a detailed actuarial process ,not so straight forward .

      Manish

  9. Dheeraj

    Hi Manish,

    Thanks for sharing such a useful info. regarding term insurance and updating how useful term insurance could be for a person and his family.

    I would like to know one more thing. Will the prospective insuree needs to pay any amount upfront (say intial premium) to the insurer co. before medical tests or the final decided premium amount would be paid on the basis of tests outcome?

  10. amit

    hello manish,

    for doctor person(35y) of income 60,000/month with one child(2y) and working doctor wife(30y),
    with no medical ilness ,drinking(monthly one pack) ,smoking(no) habbits,
    q1.what factors are important in selecting company for term plan.
    q2.can u suggest us company suitable for us for erm plan..
    q3. why they dont disqualify the application at time of applying for wrong information rather doing it after death . is there any policy we can rely for sure will help dependent after death .

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