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 provides coverage or protection over your life, for a fixed term or a set period of time, as long as the premiums are paid on time.
On the death of the insured, an indemnity is paid to the beneficiary according to the terms of the life insurance contract. It is essential to take out life insurance protection adapted to your needs to ensure that your loved ones are financially protected after your death.
India has 24 life insurance companies which 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 but a handful of cases would be a resounding “yes”. You don’t want to leave your loved ones with debts, such as a mortgage payment, that they may struggle to repay in your absence. Likewise, you would want to ensure the quality of life enjoyed by your loved ones today.
If your concern is to ensure that your children have access to quality education in your absence, it is essential to opt for insurance. This is perhaps the most important decision that will determine the future of your loved ones.
2. Should I buy life insurance now?
There’s never a bad time to buy life insurance. While this decision should not be made in a hurry, waiting for an event such as a new job or a financial milestone to take out life insurance is not prudent. There is also no age to take out life insurance.
Generally, the younger you are when you buy life insurance, the better it works for you. This is because insurance premiums are priced according to age and the older you are, the higher the premium. So there is a cost associated with waiting. Global premium rates at 30 years versus 40 years can typically be 1.5 to 1.9 times higher. In most cases, buying insurance at a later stage of life usually involves a thorough medical examination and coverage may be declined.
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 fixed term.
- Unit Linked Insurance (ULIP): This type is designed to provide a combination of life insurance coverage as well as options for building wealth from market-linked investment returns.
- Endowment insurance: This type provides life insurance protection and savings opportunities through benefits that are tied not to the market but to the performance and/or assurances of the insurance company. These schemes can be grouped together for different purposes, such as children’s insurance schemes, which help build a corpus to finance higher education.
- Retirement insurance : This is designed to create a steady income for the insured after retirement. These plans are designed to provide 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 fixed term.
3. What life insurance coverage should I purchase?
The answer depends on several factors and varies from person to person.
There are two approaches to arriving at an appropriate coverage amount:
First, calculate your future needs. This includes your annual expenses multiplied by 15 to 20 to figure out the total amount needed to support your family in your absence. This amount would cover other current liabilities like 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. coverage (usually called sum insured) you need.
Obviously a 35 year old today will need different coverage than a 50 year old. Similarly, a person earning INR 10 lakh today has different needs than a person earning INR 30 lakh. Another rule of thumb for arriving at an appropriate sum insured is to calculate about 20 to 22 times what you earn in your early years or about 15 times, if you buy life cover 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 to get the best deals.
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 life stage. It is therefore important to inculcate your insurance coverage needs at the key stages of 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 cover directly rather than through an agent, as there is no downside given the typical simplicity of the product, regulatory standards for reimbursement of claims and the fact that the price of the product is the cheapest when purchased directly from the insurer or via an aggregator.
Never forget to compare products and prices. No one but you will watch over your interests. Use insurer or aggregator resources to understand the product and options such as policy term, payment term, flat-rate coverage, or increasing and decreasing coverage, and 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 pricing is important, it should never be the sole determinant. As an informed consumer, you must compare prices but also compare insurers on other parameters. Remember that no two life insurers are alike. Consider the following:
- Among the product features, look for something that isn’t too complex but has options to meet your needs.
- Consider whether the insurer’s brand resonates with trust. If the brand is a viable financial institution, check its solvency ratio. The solvency ratio reflects the financial situation of an insurer and its ability to pay claims. It is calculated by dividing the company’s after-tax operating profit 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 reviews, understand how complaints are handled, time taken to resolve complaints, documentation required, and more. You don’t want your loved ones running from pillar to post trying to meet inane demands for a claim and for money that rightfully belongs to your beneficiary.
- It is common these days for insurers to brag about claims payout ratio statistics. While these are important, they often don’t paint the full picture. Claims settlement ratios are the number of claims paid versus the number of claims received, not the amount paid. Therefore, they can sometimes be misleading. It is prudent to take this statistic with a grain of salt.
- Be honest about your disclosures when applying for a life insurance policy and you can be assured that your claim will be paid.
Life is uncertain, but your planning and self-awareness can ensure your family’s financial well-being. Take the time to understand your needs, research your choices thoroughly, and make an informed decision. Ultimately, it’s important to give you and your family financial independence and peace of mind.