A life insurance policy is designed to provide protection against the risk of death due to accident, old age, serious medical condition or life threatening illness. It offers coverage or protection over your life, for a fixed term or a defined period, provided that the premiums are paid in a timely manner.
Upon the death of the insured, compensation is paid to the beneficiary according to the terms of the life insurance contract. It is essential to purchase life insurance coverage tailored to your needs to ensure that you financially protect your loved ones after your death.
India has 24 life insurance companies that offer several products and variants. Here are five simple questions to consider before choosing life insurance coverage.
1. Do I need life insurance coverage?
The answer in all cases, except in a handful of cases, would be a resounding “yes”. You don’t want to leave your loved ones with debts like a mortgage payment, which they might struggle to pay off in your absence. Likewise, you would like to ensure the quality of life that your loved ones enjoy today.
If your concern is to ensure that your children have access to a quality education in your absence, it is essential to choose insurance. It is perhaps the most important decision that will determine the future of your loved ones.
2. Should I buy life insurance coverage now?
There is never a bad time to buy life insurance. While this decision is not to be made in a hurry, it is not safe to wait for an event such as a new job or financial milestone to purchase life insurance coverage. There is also no age for purchasing life insurance.
Generally, the younger you are when you buy life insurance, the better it works for you. Insurance premiums are priced according to age and the older you are, the higher the premium. Waiting therefore comes at a cost. Global premium rates at 30 years compared to 40 years can generally be 1.5 to 1.9 times higher. In most cases, purchasing insurance at a later stage in life usually involves a thorough medical examination and coverage may be refused.
The most popular types of life insurance in India include:
- Term insurance: This type of life insurance is designed to provide coverage or protection for a specified period of time.
- Unit Linked Insurance (ULIP): This type is designed to offer a combination of life insurance coverage and options for building wealth from market-linked investment returns.
- Collective insurance : This type provides life insurance protection and a savings opportunity through benefits related not to the market but to the performance and / or insurances of the insurance company. These plans can be bundled together for different purposes, such as children’s insurance plans, which help build a corpus to fund higher education.
- Retirement insurance : This is designed to create a regular income for the insured after retirement. These plans are designed to offer a lump sum payment and / or in the form of an annuity or pension.
Several other insurance plans offer a combination of the above categories. For example, a whole life insurance policy would provide life insurance coverage for the whole life, compared to term insurance where the life insurance coverage is for a specified duration.
3. What life insurance coverage should I purchase?
The answer to this question depends on several factors and varies from person to person.
There are two approaches to arriving at an appropriate amount of coverage:
First, calculate your future needs. This includes your annual expenses multiplied by 15-20 to figure out the total amount needed to support your family in your absence. This amount would cover other current liabilities such as home loans etc., the cost of future life events such as your child’s college education or wedding expenses etc. From this, deduct the money already saved – fixed deposits, provident funds, etc. the coverage (usually called sum insured) that you need.
Obviously, a 35-year-old today will need different coverage than a 50-year-old. Likewise, a person earning 10 lakh INR today has different needs than those earning 30 lakh INR. Another rule of thumb for arriving at an appropriate sum insured is to calculate approximately 20 to 22 times what you earn in your early years or approximately 15 times, if you purchase life coverage in your mid-30s and beyond.
It is important that you do not rush through this step. Take advantage of online resources (websites, price comparison sites or aggregators, etc.), or even contact insurance companies for the best quotes.
It is imperative that the number you arrive at matches your needs and balances your ability to pay. Remember that the amount of insurance coverage reflects your income, expenses, savings, and stage in your life. It is therefore important to instill your insurance coverage needs at key stages in your life.
4. Should I buy life insurance coverage online through a price comparison website or through an agent?
You should always aim to purchase life insurance coverage directly rather than through an agent, as there is no downside given the typical simplicity of the product, regulatory standards regarding settlement claims and the fact that the product is cheaper when purchased directly from the insurer or through an aggregator.
Always remember to compare products and prices. No one other than you will look after your best interests. Use the insurer or aggregator’s resources to understand the product and options such as policy term, payment term, flat-rate coverage or increasing and decreasing coverage as well as helpful endorsements. When buying your first life insurance plan, it’s best to keep it simple.
5. How do I select the insurance company to purchase coverage?
While price is important, it should never be the only determining factor. As an informed consumer, you must compare prices but also compare insurers on other parameters. Remember that no two life insurers are the same. Consider the following:
- Among the product features, look for something that is not overly complex but offers options to meet your needs.
- Check to see if the insurer’s brand echoes the trust. If the brand is a viable financial institution, check its solvency ratio. The solvency ratio reflects the financial position of an insurer and its ability to pay claims. It is calculated by dividing the company’s operating profit after tax by its debts. A minimum of 1.5 is required by the regulator (or a solvency margin of 150%), and most robust institutions will have ratios of 2 and above.
- Most importantly, look at customer service reviews. Gather information from online notices, understand how complaints are handled, how long it takes to resolve complaints, what documentation is required, and more. You don’t want your loved ones running from pillar to post trying to meet the inane demands of a claim and the money that rightfully belongs to your beneficiary.
- It is common these days for insurers to tout statistics on claims settlement ratios. While these are important, they often don’t give the full picture. Claims settlement ratios are the number of claims settled versus the number of claims received, not the amount paid. Therefore, they can sometimes be misleading. It’s safe to take this statistic with a grain of salt.
- Be honest about your disclosures when applying for a life insurance policy and you can rest assured that your claim will be paid.
Life is uncertain, but your planning and self-awareness can ensure the financial well-being of your family. Take the time to understand your needs, research your choices thoroughly, and make an informed decision. Ultimately, it’s important to give yourself and your family financial independence and peace of mind.