A term plan provides financial protection to your family, assuring them a regular income after you are gone. However, you can harness its true benefits only if you make an informed choice and choose a policy covering at least your earning years. In addition, you can get protection from critical illnesses.
The key to choosing the right life insurance policy is to ensure the continuation of income while meeting financial goals. It is, therefore, important to consider variables, including income sources, dependent family members, debt, and liabilities. You also need to evaluate whether you have adequate coverage.
Things to keep in mind before taking a life insurance policy:
Tenure: For an insurance policy, the life cover offered and the tenure play a significant role as this is directly related to the individual’s life goals. “The recommended tenure of a protection life insurance policy should not be less than 60 years and can go up to 80/85 years as that’s the life expectancy currently. We all know that it takes time for an investment to grow. As such, for an investment plan, the tenure should be more than 10 years to get the desired results,” says Sandeep Mishra, chief distribution officer of partnerships and group business, Bharti AXA Life Insurance.
Claim Settlement Ratio (CSR): CSR plays an integral part in deciding the life insurance policy as it indicates the total claims settled by the company compared to the number of claims it received. A healthy claims ratio (ideally over 98 per cent) suggests that the insurer is credible and trustworthy. One must also look at the returns offered by the company/policy on their investments and check the overall credentials of the insurer before making a final purchase decision, given that this is crucial for ensuring the financial security of an individual’s loved ones.
There are various ways to calculate the sum assured, but it basically comes down to ensuring your loved ones live comfortably and fulfills their dreams even if you’re not around. Calculate your monthly expenses and multiply by 12, which is your annual expenses. They need to get this money from interest, so if the interest rate is seven per cent, divide it by six per cent.
Explains Shweta Jain, financial planner, CEO and founder of Investography, a financial planning firm: “For example, Rs 50,000 is the monthly expense, annual is Rs 6 lakh, and the corpus needed to give this as interest is Rs 1 crore. So if you had this Rs 1 crore, you wouldn’t need insurance, but since we don’t, we take this amount less any assets you have that can generate income. So if your portfolio is Rs 25 lakh, you need a cover of Rs 75 lakh. Don’t calculate your house if you own one because your family will need that to live in, and that can’t be used to generate income. Add any liabilities and loans you have to this and whatever aspirations you have for your kids. Say Rs 50 lakh for liability and Rs 35 lakh for your kids’ education. So you need a cover of Rs 1.6 crore. This is the easy way. Please remember it doesn’t account for future inflation. So, that could be added as well, but this is a good starting point.”
Choose A Company That Has A High CSR: Taking critical illness cover is also very important. You could take at least 12 months of your income. If you can’t afford that, take at least six months’ income worth of cover. As one’s life changes, our needs, and aspirations also change, so review your cover every four to five years. “Choose a company with a good track record for settling insurance claims. You can find that out by looking at the company’s CSR, which is published every year by the Insurance Regulatory and Development Authority of India (IRDAI). The CSR of an insurance company indicates the number of claims a company has settled compared to the number of claims received. The higher the CSR, the better it is,” says Satishwar Balakrishnan, MD and CEO, Aegon Life Insurance.
Consider Adding Riders: Term insurance policies allow you to add critical illness riders at a low cost. Even when you have added a critical illness rider, the premium remains the same throughout the policy term. You could also opt for an accidental death rider with an increased sum assured even if the insured dies due to an accident. Some riders pay an additional sum assured due to disability or accident.
Compare Different Policies: Ideally, you must compare with other policies available in the market, and their benefits, before opting for a plan. To compare plans, you could use online loan aggregators. Having said that, you must ensure your plan includes all the features that align with your needs.
Be thorough with the charges and services attached to the policy: Look for the digital services offered and other information that will help you later. The policy documents need to be vetted carefully. “A good way to do this is by opting for a 15-day look-in period that allows buyers to review the policy’s fine print. If something seems off or complicated, get your doubts cleared. Insurance shouldn’t be complicated. The easier it is for you to under