How To Choose The Right Life Insurance Policy

We are living in increasingly uncertain times, financial markets are volatile and economies are becoming fragile, job-market less certain. In this era of uncertainty, getting an insurance cover for you and your family has become more imperative than never before.

We never want our family to suffer financial hardships and always pray for their well being. But does praying alone will protect them against a sudden loss. The answer is a big NO and therefore the responsibility of giving financial security to our loved ones would always rely on us. Only one thing remains certain and that is called, ‘Death’. Though no one can predict when it will happen, but it will happen for sure. There has to be a well defined backup plan, just in case the unexpected happens.

Choosing the right kind of insurance cover can be the wild card in your financial plan. While there are several benefits of an insurance cover, most crucial benefit is the financial support that a family gets in the event of the untimely death of bread earner. In this process, along with correct amount of Life Cover choosing the right type of insurance cover is equally important. In many of our purchasing decisions, peers influence is there knowingly or unconsciously. However it’s very important that in insurance selection, whether type and quantum of cover, analysis of your own needs is done. Many of insurance purchased result in dissatisfaction as they are done in accordance to what peers/ others are doing rather than syncing with self goals.

Choosing an insurance policy must be based on your current and projected finances, or simply put ability to pay the insurance premiums, your medical state, your age, future financial plans, etc. Sadly, such crucial parameter is not given due thought while making insurance purchase. As a result, if we see the 13th month Persistency ratio (or in simple language, the policies that are continued for 2 years) is low for insurance companies. If we study top 2 companies’ one State and one Private, the figures are abysmally low. For Life Insurance Corporation (LIC), it stands at 66% (as on 31st Dec 2017) while for SBI Life, it stands at 72% (as on 31st March 2018). This shows that a huge number of policies went into early lapsation or forfeiture thereby causing huge financial loss to the buyer. No wonder why general person, quiver when the word insurance is taken. But actually this is a classic case of mis-buying rather than mis-seling. Because of the negative approach borne out of such bitter experience, a vast majority of population in India is yet to purchase appropriate cover for themselves leaving their families to suffer in event of any unforeseen incident. 

Listed are key factors that we must look into before going into decision of purchasing an insurance policy.

       1. Income and Liability

Insurance is a long term contract. It is not or should not be bought for short terms viz few months or few years. If insurance is bought for long term say 25-30 years, then current / projected income and projected liabilities / responsibilities must be factored into. Even if a single person is buying a policy, he must consider future responsibilities such as marriage, children education etc. Often these future events aren’t considered leading to insufficient insurance. Also income both current and projected must be considered while purchasing insurance. The major reason behind policy lapsation across industry is inability to pay premiums. Once the policy goes into lapsation the whole purpose of taking insurance (Life Cover) is defeated.

2. Cost Benefit Ratio

This is a crucial factor. If we study policies that bought in India, then we can find in many cases Sum Assured is as low as 2-3 Lacs. Now premium for these will vary between 5000-8000 per year (as per age), but then the same cover can be bought under Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) for 330 rupees. Now we must note that 3 lacs of cover isn’t sufficient at all but if you are buying the same then why go to insurers because PMJJBY have much cheaper option. Same goes with ‘insurance Riders’. Insurance Rider is an excellent tool by which one can reduce overall insurance cost. But again, in India, less than 10% opt for riders. So in nutshell, a right balance must be struck between the cost and benefits available.

 3. Cover

 This is most important and yet most ignored point in insurance selection. As discussed above, majority of policies have cover of 2-3 lacs rupees which is criminally insufficient to say the least. In case of any unfortunate event, with this money, nominees won’t able to sustain for long thus defeating whole purpose of insurance as a tool. As a thumb rule, cover should be min 10 times of annual income of life assured. This cover requirement will go up as per the future and expected liability. Today many of us have fancy cars worth Rs 10-15 Lacs but have insurance cover of few lacs only. Having such low cover would prove costly. 

Now that we have seen important factors, we must know the types of insurance

Term Insurance

Term or pure protection insurance is the most basic type of life insurance. It is the most affordable form of life insurance as premiums are cheaper compared to other life insurance plans. A fixed amount is paid to nominee in case policyholder expires within the term of policy. However there is no bonus component and Maturity Value in this policy

Endowment plans

The key variable in an endowment plan is the concept of maturity benefit. In an endowment plan, 2 kinds of payouts are made, survival benefit and death claim payout.  However, endowment plans are costlier than term because element of saving. These policies offer 3 in 1 benefits of stable returns along with life cover and tax free maturity.

Whole life policy

As the name suggests a whole life insurance policy covers a policyholder over his life (or till 100 years of age). Term insurance is offered only till 70-75 years age and as such there is no use of these in the sunset years (post 70-75 age) in which the probability of death is far higher than that in younger age. Whole life policies score in this crucial area.  These policies also offer 3 in 1 benefits as mentioned above. LIC has plan called Jeevan Anand which gives a certain maturity at end of policy term and basic insurance cover remains active till age of 100. This truly epitomizes, “Jindagi ke Sath Bhi, Jindgi ke Baad Bhi” motto.

Money back policy

A money back policy is a variant of the endowment plan. It gives periodic payments over the policy term. These periodic payments (also called Survival benefits) are linked to Sum Assured and are tax free. If the policy holder survives the term, he gets the balance sum assured in lump sump payment. In case of death over the policy term, the beneficiary gets the full sum assured irrespective of money paid as survival benefits.

Unit linked insurance plans (ULIP)

ULIP plans differ from above mentioned traditional plans. As the name suggests, performance of ULIP is linked to markets. ULIPs therefore aren’t substitute for traditional insurance policies.

To summarise, we would emphasize that insurance should be considered as a separate asset class and considerable thinking process should be given to it before finalizing cover and type of insurance policy. You can call us at +919325295502 or email us at [email protected] for further details