5 things to know while buying life insurance

5 things to know while buying life insurance

5 things to know while buying life insurance
In India, family is the most important institution that has survived through the ages. As more and more families are moving from a joint family structure to a nuclear one, mostly a single person is responsible to ensure welfare, economic stability and protection of the family members. While one might strive to increase his/her earning capacity for better lifestyle, save for higher education of the child or any such goal/objective, life is highly unpredictable and uncertain.

And absence (death) of this sole breadwinner can cause serious turbulence in the life of the family members leading to financial hardships, incomplete goals or even sometimes providing for basics. Life insurance plays an important role to solve these problems and in fact, essentially sits at the core of providing protection to all that a breadwinner strives to do for his/her family.

Unfortunately, today, many individuals overlook insurance entirely or generally consider it as the last investment option very often treating it like any other financial instrument that can be purchased to reduce their tax liability. Such approach is erroneous and leads to great deal of confusion, and even scepticism, regarding life insurance. Hence it is imperative to understand as to what insurance is technically meant for and why and when one should buy it.

Here are few guiding principles one should follow or mull over before buying life insurance:

1Why do you need life insurance?
The first and foremost reason is that you have dependants that will be financially impacted and there aren’t enough assets to take care of their needs in case you are not around. Life cover essentially helps those who are left behind to cover outstanding debts and mortgages, planned education expenses and maintenance of decent lifestyle.

Life insurance is also a good bet if one wants to save for a specific goal like child education and at the same time ensure that saving continues in case of death or disability.

2How to choose the right plan?
Question to ask here is what are my current and future financial needs?
Life insurers today provide plethora of plans ranging from pure protection to those that provide certain investment gains along with life cover. These plans are aimed at meeting various needs of the individuals according to the life stage they are currently in.

With this overwhelming choice offered by insurers it may become difficult for an individual to choose the right match. Therefore, there are two broad varieties of life insurance that one should be aware of — Term insurance (for purpose of protection only) and Savings insurance (for purpose of investing as well as insuring)

Term insurance is a basic life insurance plan which provides pure protection at a minimal cost compared to the coverage amount offered. This is the most recommended form of life insurance that an individual should buy. While buying term insurance, the two main factors to decide are the amount of coverage one needs and associated cost for it.

Coverage amount should be decided based on how much is required to pay of any outstanding debts, to meet any financial goals and family income one needs to provide to maintain current lifestyle. Since it is a basic insurance offered by many insurers, looking for a cost efficient plan is of utmost importance. The final coverage amount or cost will also be factor of age, current health status and income of the insured.

Savings insurance plans offer cash value at the end of the selected term along with life cover during the term. Such plans are commonly known as:

UILPs: Returns expected in these plans are linked to underlying assets that are invested in the market

Participatory plans: Part of the returns come from bonuses declared out of profits of pool of similar policies

Guaranteed returns plans: Returns are known at the outset and are guaranteed to be paid after the end of selected term These plans are a good option if one is planning for some goals like child’s education and marriage or saving for a big expense in future like down payment for a house. One can select any one of these available plans depending on the expected returns, risk appetite and time horizon that suits one’s financial objective. The insurance element in these plans is paid in the form of lumpsum, income or premium waiver so that the savings for these goals continues uninterrupted in case of early demise of the life assured.

3Is your cover comprehensive?
Now if you have covered the eventuality of death, there are other eventualities like disability and critical illnesses/diseases that hinder the earning capacity of an individual. Moreover, these can cause significant dent to the savings kitty derailing all the future financial plans of an individual.

Some life insurance plans combine death, disability and critical illness benefit under one roof for easy access, saving cost incurred while buying multiple polices. However, buying it separate or under one plan is the prerogative of the individual, more important is to have comprehensive coverage against all these — Death, Disability and Diseases.

4Know your policy details before and after you purchase your policy
Since insurance is a long-term contract between the insurer and the insured, it is necessary to understand the key features of the policy such as events covered, term of the policy, build up of benefits over the term, commitment to pay premiums, different charges if any, options available, penalties in case of discontinuance of premiums, etc. Most insurers have agents as representatives to help you understand these aspects. It is also very critical to provide correct information especially age, health and income, sought by the insurer in the proposal form. The proposal form should be filled by the proposer rather than a third person like an insurance agent. This will automatically take care that information provided is correct, as it will make critical difference during claim.

If life insured ensures that above mentioned factors are looked into carefully, then it usually helps to avoid any grievance resulting into cancelling or surrendering of the policy, or even worse — repudiation of a claim.

5Revaluate your insurance needs every five years
Insurance needs will always change as one progress through various life stages. Revaluating your current insurance with respect to addition of new dependents, increase of financial liabilities, new goals and inflation will help individuals to optimise their insurance needs effectively.

(The wrtier is Senior EVP, Chief  & Appointed Actuary at HDFC Life)

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