With so many life insurance companies around, there is an overdose of schemes in the market.

The biggest mistake you can make is to assume that these schemes are the same and sign for the one your agent recommends.

When you are deciding on insurance, don't make any assumptions; take nothing for granted.

Here are four questions you must ask yourself before you opt for any scheme.

1. What do I have to pay?

Premiums are what you pay the insurance company when buying a policy. This could be a one-time or an annual payment. It could be for a few years or for many years.

A friend of mine took a money-back scheme which needed him to pay a very hefty premium for just three years. When he turns a particular age, he will be given a lumpsum.

There are other schemes which require you to pay a premium till you turn 55 years of age. After that, you get a lumpsum returned to you.

Still others may require you to make a payment just once.

Issues to consider

Are you taking a scheme that requires you to pay a premium only for a few years? If yes, is it very high? Will you able to service it without struggling to make ends meet?

Are you paying a premium every year? Will you be able to cough up that sum even if you are without employment for a year or two?

I took a policy that requires me to pay around Rs 43,000 every year so that I will get a huge amount when I am 55. The problem is that I was very enamored when I signed the policy. Now I am finding it a huge liability to give that amount every year. Moreover, if I want to take a break from work for a year or two, I will find it a big struggle.

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2. What will I get?

What is it you are looking for when you buy insurance?

Are you scouting for an insurance cover to protect your dependents in case you die? Then just a term life will do. Here, you pay a premium every year till the tenure of the plan. If you die during this time, your dependents get the money. If you live, which is what you are hoping will happen, you get nothing.

So let's say you take a 10-year term insurance plan for Rs 10 lakh (Rs 1 million). If you die during this time, your nominee will get Rs 10 lakh. If you live, no one gets anything.

The good news is that term insurance is the cheapest life insurance available.

Are you looking at a retirement plan? Are you looking at supplementing your income after a particular age? Then you should go in for a plan that gives annuities. This is a plan which gives you a fixed amount every month (or at fixed periods) after a particular age.

Or are you looking a lumpsum? Then opt for an endowment plan which will give you a fixed amount on maturity.

Death

How much will my nominee get if I die?

Money-back

If I die, will my nominee get anything? If I live, how much will I get on maturity?

What is the sum assured? This is what you are sure of getting.

What is the maturity amount? Besides the sum assured, there may be additional bonuses. These bonuses plus the sum assured will give you the maturity amount.

At what age can I expect this amount?

Annuity

How much can I expect?

At what age will the payments start?

Will they be made every month or every quarter?

For how many years will the payments be made?

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3. What sort of a bonus can I expect?

First, you need to find out if your scheme provides for a bonus. If it does, you need to determine whether it is a reversionary bonus or just one at the end of the term.

Reversionary bonuses are added to your policy through the term. It may be declared every year or every few years, but it will not be handed over as soon as it is declared. It will be added to your sum assured (the money you are sure of getting at the end of the term).

Is the bonus variable? If the bonus is not fixed but depends on the profits of the company, it is referred to as a with-profit bonus. Are you willing to take the chance that, in some years, the bonus declared may be very low or, if the company does not make much of a profit, it will not declare a bonus?

I know someone who was told he could expect around Rs 20 lakh (Rs 2 million) on maturity. But he later realised the bonus was a with-profit bonus. The sum assured was just Rs 10 lakh (Rs 1 million). The agent calculated an 'expected bonus' for each year and arrived at the amount.

The with-profit bonus is offered purely at the discretion of the insurer and depends on the profits made that year.

As opposed to it, there is a guaranteed bonus. This is part of the sum assured. It will be paid to you on maturity of the policy or to your nominee if death occurs before that.

Once you get a grip of these issues, you will be in a much better position to compare plans from various companies.