Passing of the food provider of the family can be emotionally and monetarily awful for the dependents. If you have the correct life insurance, then the financial part of your family can be taken care of. Here are 9 tips to buy the right life insurance policy, you should thoroughly consider before you purchase any life insurance.
9 Tips to Buy the Right Life Insurance
1. How much life insurance you need?
The First thing is to assess how much life cover you need. There are various strategies to calculate that, but generally, the figure varies between 10 to 12 times your yearly income + (any liabilities – any assets (exclude your home)). If you have no financial dependent, then you do not need any life insurance. The insurance quantum also changes if your dependent has his/her source of income. You need to calculate this figure each year to check whether you are enough covered.
2. Pure Term insurance is the BEST
There are term insurance policies and insurance cum investment like ULIPs (unit-linked insurance plans), endowment, or whole life policies. Stay away from insurance cum investment policies. Pure term insurance products are the best choice.
You should stick to pure term insurance policies – which implies there is no return if no death. Insurance agencies also classify the return of premium policies as term insurance where the premium paid is halfway or completely returned in case of No Death. Avoid such varieties as these are costly plans and many times its tenure is limited.
3. Online or Offline Insurance?
Practically all life insurance companies offer term plans online and offline. You should purchase insurance online from the companies’ website just as it’s almost 40% less expensive than the offline agents. Offline term plans have agent commission incorporated into it and hence are costly. While purchasing through company website only and not through web aggregators or online re-merchants. Purchase offline only if you are not net-savvy.
4. Single or Regular Premium?
Many insurance agencies give an upfront rebate for a single premium payment versus the standard yearly payment. We preferred to take standard mode because:
- Single premium ties you up to the insurance plan till maturity. In the last few years the insurance premium has gone down. Had you been tied to a single plan you could not switch to new plans which might be cheaper in future.
- If death occurs right after buying policy, the premium paid is much higher in case of single payment. There is no provision of pro-rated refund.
If you bring in account the time value of money the single premium is not as discounted as you think. Here is a comparison
- Regular Premium – Rs 7,306/year
- Single premium – Rs 1,53,431
If you keep the single premium amount of Rs 1.5 lakhs in a debt fund with an interest rate of 7%, you would earn an annual interest of Rs 10,750 which is more than the regular annual premium required! So it makes no sense to pay a single premium.
5. Lump sum or Installment payout?
Insurance agencies are known to enhance, recently they started promoting installment (monthly) payout on death of the policyholder. The justification given is it helps family members who may not be able to deal with such a huge amount at a time can lead to financial catastrophe. This may be valid for financially illiterate people but you should not pick the same if you know that the family members are capable of managing the huge money. This is mainly because the installment plans are relatively costly.
6. Avoid Over-insurance
Insurance premium increases with increases in age, so it may appear to be a smart thought to purchase higher insurance cover than required. But the premium increase is counterbalanced by the decrease in tenure. Here is an example – If you purchase one crore insurance at 25 years old years for 35 years. The premium would be Rs 481/month and on the off chance that you purchase the same one crore insurance at 35 years old for 25 years, the premium would be Rs 701/month.
- 25 Year, Non Smoking Healthy Male for 1 crore for 35 years – 481 = 481 X 12 X 35 = 2,02,020
- 35 Year, Non Smoking Healthy Male for 1 crore for 25 years – 701 = 701 X 12 X 25 = 2,10,300
As you can see the total outgo does not change much. So you can add insurance as required. Also, some insurance companies may deny a higher insurance cover.
7. Go for Maximum Tenure
Some Insurance agencies are currently offering plans with a term as long as 55 years. This is something beneficial for policyholders. Preferably insurance cover matters till retirement but in case you have a few liabilities after that the enhanced term can help.
The difference in low vs high tenure premium isn’t high thus it makes sense to settle on a higher term. You can stop the policy midway if you do not need it further.
8. One or Split in Multiple Policies?
If you need a huge life cover, would it be advisable for you to choose one policy or split it into various smaller policies? To start with, you ought to settle on one policy as you get significant funds in premium. For example
- Rs 1 crore insurance – Rs 553/month
- Rs 2 crore insurance – Rs 1016/month
So if you split 2 crore policy in two Rs 1 crore policies the monthly premium would be Rs 1106 (553*2) which is 9% higher than single policy.
Anyway, you may have to purchase separate policies as your liabilities go up – which can be discontinued as these objectives are cultivated.
The conviction that high worth insurance has more scrutiny and higher chances of disavowal isn’t correct. The claim can be dismissed if the declaration gave at the time of purchasing insurance was false. Additionally, every time you purchase insurance you need to declare all the prior insurance with you. So if one policy is disavowal chances are altogether would be and vice versa.
9. Riders or No Riders?
The life insurance items accompany a lot of riders like accidental death, critical illness, etc. The question is, would it be a good idea for you to go for them?
I don’t encourage to pick riders as they are not comprehensive. As in many life insurance plans, critical illness covers just 4 diseases. Where some other life insurance companies the coverage is for 30+ diseases – which is more comprehensive.
Also you can buy Personal Accident Insurance from any general insurance company which offers more comprehensive and wider coverage.
The other issue is as the riders are connected to the life insurance, you would lose them if you intend to change your insurance plan in the future.
Some more Pointers
- You probably won’t get the insurance amount you are searching for as all agencies have a cap contingent upon your yearly income. Over-insurance raises warning for insurance agencies as it can lead to misrepresentation or fraud.
- With a recent amendment, insurers cannot reject claims after three years of policy purchase citing discrepancies in a declaration.
- Early death claims (within 3 years of insurance purchase) are subjected to higher scrutiny for veracity from the insurer.
- When purchasing life insurance, the country of present home and current occupation matter. After you purchase it, a change in nation or area doesn’t affect the existing policy.
- Term plan covers include death due to natural calamities or terrorist attacks.
- In the case of suicide within 12 months of purchase/revival of the policy, dependents would not get the insured amount. Most companies would refund the premium received.