How to choose the right life insurance plan?
Choosing a life insurance plan is one of the most significant financial decisions that you will make for the welfare of your family. In simple terms, a life insurance plan is a safety net against life's uncertaintyes.
One cannot overlook the significance of life insurance. It offers your dependents or family considerable protection in case the main earner passes away too soon.
Reasons to include life insurance in your portfolio –
Financial security
A life insurance plan is an agreement between an individual and an insurance company, where the insurer guarantees to pay a particular amount to the designated beneficiaries on the death of the policyholder. This amount is called the death benefit.
It ensures that your family can maintain their current lifestyle, even in your absence. This financial independence is crucial if you are the family's sole breadwinner. The death benefit can be used to pay for daily expenses, children's education, or any other financial needs.
Debt repayment
Furthermore, the life insurance payout can be used to cover existing debts or loans of the policyholder. This may include mortgage loans, car loans, personal loans, or even credit card bills. This is to avoid the unjust debt burden being transferred to your loved ones in the event of your demise, thus protecting your family's future.
Retirement planning
Some life insurance policies, for example, endowment plans or unit-linked insurance plans (ULIPs), have a savings and investment component. These schemes not only provide life cover but also accumulate funds over time which can be used as a source of income during retirement. The policyholder can decide to receive the maturity benefits in a lump sum or as regular payments during their retirement years, which will give them a stable income source.
Tax benefits
One of the key benefits of life insurance plans is the tax advantage that they come with. The premiums paid towards life insurance policies are tax deductible under Section 80C. This can help reduce your taxable income and hence lower the amount of tax you must pay. Also, the death benefit received by the beneficiaries and the maturity benefit (if applicable) are free of tax under Section 10(10D) of the Income Tax Act.
Long-term investment
Life insurance plans, especially those with savings components like ULIPs or money-back policies, are useful financial products for long-term investments. These policies invest a part of the premium paid in various debt and equity instruments, providing opportunities for capital appreciation.
Besides, some policies have maturity benefits where the policyholder gets a lump sum on surviving the policy term. This sum could be quite significant, especially for policies with a longer term, making life insurance a good option for long-term financial planning.
Selecting the right life insurance plan
Understanding your needs
Your life insurance option should be in line with your life stage, financial state, and your family's needs. A single, unmarried young professional will have different insurance needs than a married individual with children. Knowing what you need will help you to choose the right plan and coverage.
Type of plan
Life insurance is available in different forms, including term insurance, which is designed to cover a specific period, whole life insurance which offers coverage for the entire lifespan and endowment plans which combine insurance and savings. Understand each type's features, benefits, and limitations to select a plan that aligns with your goals.
Coverage amount
The insured amount must be enough to cover the family's living expenses and debts in case of your death. A thumb rule is to have coverage that's 10-15 times your annual income.
Premium amount
The premium is what you pay regularly to keep the policy in force. It should be affordable and not be a burden on your budget. Compare different plans and opt for the one that offers the best coverage at the most affordable premium.
Claim settlement ratio
This ratio explains the number of claims paid by the insurer against the total claims received. A higher ratio indicates that the insurer is reliable and has an impeccable history of settling claims.
Policy term
The policy term is the period for which the insurance coverage is effective. Select a term that is consistent with your financial goals and offers coverage when it is needed the most.
Inflation
The purchasing power of money goes down due to inflation. Select a coverage amount that takes into account the increase in living expenses brought about by inflation.
Rider options
Riders are supplementary benefits that can be added to your basic life insurance policy. These may include coverage for critical illness, accidental disability, and so on. Take riders depending on your requirements and risk factors.
Flexibility
Look for policies that offer flexibility in premium payment frequency, term length, sum assured, etc. This flexibility can make it easier to manage your policy as per your changing needs.
Company reputation
The insurer's reputation is vital. Research the insurer's customer service record, market reputation, and feedback from other customers before making a final decision.
Solvency ratio
This ratio expresses the insurer's ability to pay claims. A higher solvency ratio is an indicator of an insurer's better financial health.
Policy loan
Some policies enable you to borrow up to a certain percentage of your policy's cash value in case you are experiencing a financial emergency. Check if this feature is available.
Surrender value
In case you decide to cancel the policy before its maturity, you may receive a certain amount, called the surrender value. Know that this value has its conditions.
Policy revival
Some insurance companies provide a revival option in case your policy lapses due to non-payment of premiums. Understand the terms and charges of policy renewal.
Free-look period
You have this window of time to check the terms and conditions of the policy and return it if you're not happy. Make the most of your time to fully comprehend the policy.
Exclusions
These are the terms or situations where the insurance company declines to pay a claim. Learn about these restrictions so that you are not caught off guard later.
Survival and death benefits
Recognise the benefits that you or your beneficiaries will get if you live out the policy's term or pass away.
Investment component
Investment and insurance are combined in ULIPs. Before choosing such plans, be aware of the costs, investment risks, and prospective returns.
Conclusion
Selecting the appropriate life insurance policy is like providing your family with a lifeline of income. It is not just about buying a policy but buying peace of mind. Note that the goal of purchasing life insurance is to protect your loved ones' finances in the event of your untimely death, not to amass wealth.
Thus, take your time, do your homework, and select a life insurance policy that best fits your goals and circumstances. After all, you don't make decisions that have such a significant influence on your loved ones' futures every day.
