Life insurance is the most important financial tool for the protection of your family’s long-term finances should you meet an untimely end. Whether you are at the starting stage of your career or at its last leg, you should not ignore the importance of life insurance. Without a protective cover, your financial planning may be incomplete.
This being the end of the financial year, you may be looking to purchase investments and insurance products to save tax. However, we would advise you not to rush into buying insurance products without due diligence. Life insurance plans are long-term commitments, and you must get into one only when you’re assured that it will take care of your financial interests in the long run.
So here are some thoughts to guide your life insurance purchase:
Things to consider while buying life insurance
|Number of dependents in the family|
|Income level and liabilities|
|Prevailing and expected future inflation rate|
|Key future expenses|
|Selection of beneficiary|
|Deciding appropriate tenure of insurance policy|
|Selection of reliable insurance company|
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What type of policy should you buy?
There are different types of life policies available in the market: term policy, endowment policy, unit linked insurance plan (ULIP), pension plan, money back plan etc. How to find out which one suits you best? While buying an insurance policy, you can look at it with two perspectives, i.e. you can get only life insurance, or life insurance along with investment benefits. When you buy insurance only to cover life risk, your premium is low. But when you add investment benefits to it, the premium becomes higher. Your primary need from a life policy should be to cover your life risk. If you want to invest or save tax, there are plenty of other attractive investment instruments that offer you higher returns while providing tax savings.
How much would insurance cover be adequate?
Normally you should get a life insurance cover equivalent to 10 to 20 times your family’s current and future financial requirements. Such a cover would support your family in your absence for 10 to 20 years, helping replace the income that you would have generated. It is very important that you do not get under or over-insured. If you are under-insured, your family may find it difficult to sustain themselves in the absence of your income. Similarly, if you are over-insured, your extra premiums could be better used by being diverted to investment instruments that will fetch you high returns in the long term.
Who is your beneficiary?
Beneficiary selection is a very important step in insurance buying. The beneficiary should be the person who you trust completely to use the insurance fund for the betterment of your family. A beneficiary could be your spouse, child, sibling, etc. It is important to explain the details of the policy to the concerned beneficiary in detail so that they may not be in the dark.
Should you buy online or offline?
Don’t settle for the first policy being suggested to you by your agent or branch manager. The best way to buy insurance now is to research, compare and then buy. Going online, you can access a wide array of insurance products that you can find using your unique search parameters and compare them across features, price, riders, etc. Once you find the right policy for you, you can either proceed with the purchase or be in touch with your agent to understand the policy details better. The agent would also stay in touch with the beneficiary if at all a claim needs to be made.
What should be the tenure of life insurance?
Ideally, the life insurance should cover you at least till your retirement age, which is around the age of 60. However, if you think that your financial responsibilities will go beyond the retirement age, you can get an insurance policy of a longer tenure. Cost-wise, a longer tenure insurance policy is comparatively expensive. Therefore, it’s best to restrict the tenure to your retirement age. The tenure selection should be done with extra care and planning. You must figure out all your future responsibilities and accordingly decide the tenure. A shorter-than-required tenure can expose your family to huge financial risks, but a pointlessly long tenure would also unnecessarily cost you extra premium. So strike a balance between those two extremes.
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Apart from five questions that we have just covered, you should also take care while selecting the insurance company and look at their claim settlement and service quality. Premium costs should not be the sole criteria of selecting the insurance policy.
Additionally, your insurance needs should be analysed from time to time, and adjustments should be made as per your prevailing financial condition and even rising inflation levels. The insurance needs of a person varies as per the stages of life. Therefore, you must carefully think your purchase through.
(The writer is CEO, BankBazaar.com)