5 critical checks when buying Life Insurance

How many of us really know whether the life insurance policy that we hold is suitable for our specific needs? Many a times the decision to purchase a life insurance policy is taken considering taxation benefits or we blindly follow the advisor’s advice without knowing whether the chosen plan is suitable for our circumstances. So, what are those critical checks that we need to ensure before buying life insurance:
1)      Treating insurance as an investment:
Before deciding to buy a life insurance policy, do ask yourself the reason you wish to buy a life insurance policy. If it is to provide financial stability to your family, then go for a pure term plan as this will offer you a higher insurance cover at much lower premium as compared to a unit linked plan or a traditional plan. Here, do note that term plans do not provide any survival benefits.
In case you wish to enjoy both insurance coverage and receive survival benefits then you may consider traditional plans such as endowment or money back or market linked plans such as ULIPs. The premium of a traditional plan or ULIP will be much higher than that of a term policy for the same coverage. For instance, for a cover of Rs 1 crore, a 30 year old non-smoker man needs to pay Rs 8,500/- annually for 30 years under a term plan but needs to pay around Rs 1 lakh annually for 30 years under an endowment plan.
In case you are going for traditional plans or ULIPs, also be prepared to receive reasonable returns. If you do have the time and inclination to keep your insurance and investments separate it is best to go for a term plan for your insurance needs and consider other avenues such as mutual funds for your investment needs to maximize returns.
2)      Check the duration of insurance coverage:
It is best to buy a policy which covers you for your entire working life. If the insurance cover is only till say 50 years of age when there would be higher family responsibilities, then do consider that at this age it will be more difficult to buy a new policy on account of the advanced age and any health issues that may have cropped up in the interim. You may be denied insurance cover altogether or may have to pay a hefty premium.
3)      Make truthful and complete disclosures
Do answer all the questions posed by the insurer truthfully as this is the basis for determining the premium amount and the insurance coverage that can be provided. If a claim arises and the insurer proves that the claim has arisen because of a condition which was present at the time of taking the policy but not disclosed to them, they can deny the claim altogether. It may be noted here that as per the Insurance Laws (Amendment) Act 2015 life insurers cannot reject claims made on policies that are over three years old (i.e. three years from the date of issuance of the policy or the date of revival of the policy, whichever is later).
4)      Opt for sufficient insurance coverage:
It is prudent to consider the total outflows and your life goals that would be impacted in case of your untimely demise before arriving at the coverage amount rather than just choosing an ad hoc amount. The most basic rule of thumb is provided by the income rule which holds that the insurance coverage should be at least around ten times one's gross annual income. For example, a person earning a gross annual income of Rs 1 lakh should have about Rs 10 lakh in life insurance cover.
5)      Check claim settlement ratio of insurer:
The zest to acquire new business is very high among all companies. However, does the same zeal exist at the time of claim settlement? You would not want your loved ones to be denied the claim or be running from pillar to post for getting the insurance money. The website of the insurance regulator, IRDAI provides the claim settlement statistics. Do check the claim settlement ratio before choosing a life insurance company.

Hope the article has been helpful. Also, buying Life Insurance should not be considered as a one-time activity. With changes in your income, family responsibilities and life style you would need to review your existing insurance coverage and make modifications if required.

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