Always remember one thing whenever a salesperson is pitching a product to you, specially an investment product. If it sounds too complicated, it’s better to ignore it. This goes true for Life Insurance too. Let us learn the why, where, which one etc.
Let’s start with what you are not supposed to do:
Don’t go for an endowment plan, money back plan, or anything that gives you any return at all. The premiums of these plans are too high, the returns are way too low, as is the cover (the amount the family gets in case of death).
Investing this amount somewhere else will give a much higher return. And the worst part is that the basic purpose of a life insurance, providing an adequate cover, is itself not fulfilled.
Now what you are supposed to do is:
get a Term Insurance Policy. And get it with your first salary.
The longer you delay, the higher your annual premium will be.
Secondly, statistically, if the death occurs within a few years of buying the policy, the chances of rejection shoot up.
In case of term insurance, you get no return, unless the condition of the insurance in invoked i.e., at the time of the insured person’s death. This is to ensure that your family faces no financial problems in the worst case. The bare minimum cover you need is enough to cover any liabilities you have on you. It should also be able to cover major future expenses like your children’s education, weddings etc. The general suggestion is that it should be 10 times your annual income. Accounting for inflation, the life insurance benefit should cover your family for the next 6-8 years, which will give them enough time to come up with new sources of income.
The minimum age till which you should be insured is the age till which you plan to work, 60 years in most cases. This is also the age by which family members also become independent.
Consider add-on factors like:
- Accident cover, which will give you a fixed amount depending on the kind of injury you sustain, if and only if you travel a lot. It also pays an additional sum to the nominee in case the insured dies in an accident.
- Future Premium Waiver, where your premiums stop in case of an accident or other pre-defined clauses, but the policy remains in force.
To finalise the company from which you should buy life insurance:
- go for a trusted name,
- with a good claim settlement ratio (the number of claims they fulfill divided by the number of claims they get),
- good amount settlement ratio (the amount they pay for these claims divided by the total amount claimed. A few companies are notorious for paying off small claims and holding the bigger ones. This keeps their claim settlement ratio intact, while causing problems for people with bigger claims), and
- good solvency ratio (everything will come to naught if the company just doesn’t have enough cash to pay when your most needs it).
Another important facility the company should provide is a feature called income benefit. If you opt for it, instead of a lump-sum amount, your family gets a fixed income for a fixed period of time. This is something that helps people get back on their feet more easily.
I have always been advocating against lump-sums being paid to anyone. There are numerous cases of lottery winners, inheritors etc. swindling off the amounts they got, and reaching their previous financial situations very quickly. Your premium can be lower if you go for this option.
The other options are increasing monthly payout, where the payout increases every year to account for increased expenses because of inflation.
You can also choose the Lump sum + monthly income option where a small part of the payout is handed over immediately, and the rest is paid monthly
Of course, not every company offers every option.
What is not covered in a typical Term Insurance policy?
This obviously differs for each policy, but most companies exclude Death due to terrorist attack, war and natural disasters. This is because there are normally too many claimants in these unfortunate situations.
A few additional tips:
- Annual premium payments will turn out to be cheaper than monthly payments.
- If you smoke or drink, do not hide it from the insurance company. This might increase the premium, but otherwise the company can refute the claim based on non-disclosure.
- Set up reminders for your premium payments.
- Find out if the premium will remain constant throughout the policy, or if it will increase with time. It should remain constant.
- In case you have any kind of debt, your creditors will have the first right over the policy proceeds. You can choose to go for a clause invoking the Married Women’s Property Act. This will give complete rights over the policy proceeds to your wife and kids.
- And when you get you policy papers, don’t forget to check the details like your name, address, cover details etc.
Don’t forget to claim deduction under Section 80C while filing your Income Tax Return.
There are plenty of websites and agents from where you can buy Life Insurance. Go to Google and search using the criteria mentioned in this post.
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