The process of saving and accumulating wealth to take care of your family can take years or sometimes decades. I have strived my entire career to build a stable financial base for my family. During this time, I accumulated savings and investments to plan for future goals like buying a first house and saving up for my daughter’s education. But before I started saving up for these goals, I bought a life insurance policy that covered my family’s financial needs. So that they would have a monetary cushion in case of my sudden demise.
Life insurance is the fastest and easiest way to ensure that your family remains financially protected. It can clear debts, pay for a child’s education, bear medical expenses, and secure the business and assets of a family. Choosing the right life insurance product has not always been easy – but with a little foresight, it can be.

The ideal life insurance plan is affordable, can be tailored to your needs, and offers the right benefits. 

There are many types of policies, and it is easy to be overwhelmed by the options available. Before you buy a life insurance policy, I recommend making the following checklist of requirements:

1. What is your objective for buying life insurance?

When you identify the objective for buying insurance, you will be able to pick the right one suited to your need. Your objectives could range from providing your family adequate financial cover in case of your early death, saving for a specific goal like funding a child’s education or generating income after a certain age (post-retirement).

2. Choosing the right life insurance plan

It is vital to choose a plan that provides adequate financial cover, and there are different insurance products available to choose from. These include:

• Term Plans: If you are a significant contributor to household income, having a term plan is essential. These plans offer the highest life cover for a relatively low premium (price), protecting a family from a financial crisis if a policyholder dies. Term plans are valid for a specified period (or term) which typically covers you during your earning years. The best time to buy a term plan is as soon as you start earning because the lower the age, the lower the premium you end up paying!

• Savings Plans: Savings plans are life insurance products designed to assist you with saving money regularly. Just like you put regular deposits in a bank and earn interest, this plan allows you to save on a regular basis and earn interest. But in addition to savings, you also get the benefit of a life cover. If you die an untimely death, your beneficiaries receive the savings AND an insurance payout which can be 10X the money you put in. But assuming you remain healthy (and I hope you do!), you will have savings plus interest, similar to what you would receive if you had opted for a fixed deposit or recurring deposit with your bank. If you have medium to long-term objectives like funding a child’s education, a home renovation, or buying a vehicle – a savings plan is right for you. 

• ULIP or Unit Linked Insurance Plans: Unlike a savings plan where the goal is guaranteed savings. The goal of a ULIP is to build wealth by participating in market-linked instruments. Part of the insurance premiums goes towards insurance coverage while the remaining portion is pooled with assets from other policyholders and invested in various market-linked instruments like equities, bonds, or a combination of both as per your choice and risk appetite. While a savings plan offers you a fixed return, ULIPs can provide a significantly higher return based on the investment strategy you have opted for. The returns are are linked to the performance of the funds you choose to invest in, so it is inherently riskier. As in all things in life, the greater the risk, the greater the reward. If you have some disposable income, some appetite for risk and are planning to create wealth for your future, a ULIP is a great option. And the life cover ensures that your beneficiaries remain financially secure if you are not around.

• Child Plans: Some ULIPs and savings insurance plans can also double up as an investment plan for your child to help them fulfill specific life goals like higher education or marriage. Typically, these plans can be bought for children as young as 90 days and as old as 16 years. New parents, please note that the earlier you buy a child plan, the better it is, as you can then utilise the compounding effect of the plan most efficiently. Often, these plans offer a premium waiver feature, which means that all future premiums are waived in case of the death of the person paying the premium. However, the policy continues to pay for the planned tenure. Thus, the benefit meant for the child remains intact under all circumstances.
• Retirement Insurance Plans: These help in creating a personal fund and generating a regular income after retirement in the form of a pension. When buying such a plan, you must consider your monthly expenses, inflation, medical expenses, and life expectancy. And if this seems too complicated, do not worry. There are free calculators available online that can do the work with just a few simple inputs. It is important that you buy a retirement plan sufficiently in advance of your planned retirement so that there is ample time to accumulate funds that will provide you with the requisite income. In case you are already assured of a lump sum amount at your retirement, you can consider buying an annuity plan with that amount, which offers a regular pension income and often provides the option to continue paying an income to your spouse in case of your demise.

3. Calculate the life cover for term insurance

The life cover will help your family maintain their lifestyle in the unfortunate event of your death. To decide on the life cover, you need to keep in mind the major life events that will occur in the future. They include inflation, education of children, their marriage, your spouse’s income, retirement, etc.  To calculate the minimum cover you need, use the common thumb rule of a life cover that is 10 times your annual income. If your current annual income is Rs 10 lakh, you should have a life cover worth at least Rs 1 crore.

4. Decide on the ‘term’ in term insurance

The ‘term’ or the tenure of the insurance policy is largely defined by your current age and the age at which you plan to retire.  It is critical that you get this right as this choice must be made at the time of buying the policy and once chosen, cannot be changed later.

Your policy should ideally start as soon as you start earning to lock in a lower premium. The policy duration should cover your working age up to retirement. Because if something were to happen to you in this duration, the term insurance money will replace your income and help your family manage their lives.

Also, remember, there’s no point in covering your life beyond 70 years of age. Because by then, you would have already crossed your working age and probably fulfilled most of your financial responsibilities.

5. Adding Riders

Riders are extra benefits you can buy to add to a life insurance policy and provide added protection if you meet their conditions. The right rider benefits added to the basic policy enhance your coverage and protect against added risks. For instance, an accidental death benefit rider pays an additional amount in case of accidental death. A rider for critical illness offers a payout on diagnosis of the covered illness, which can help with medical expenses. The extra premiums for such riders are often nominal. 

6. Check the Claim Settlement Ratio of insurers

The Claim Settlement Ratio (CSR) is the percentage of claims an insurer settled out of the total claims received. Many view this as an indicator of a brand’s credibility. The higher the percentage, the better the claim settlement ratio of the company. 

7. Provide correct disclosure and information

For many of us, filling out forms may seem taxing. But no matter what, do not skip this process. Providing accurate information is vital for the insurer for risk assessment so that they can provide you with the optimal insurance coverage, and any inaccuracies discovered may lead to claim rejection.

With so much happening in the world of life insurance products, all you need to do is follow this checklist, and you can never go wrong! Just make sure you do your research, avoid buying in a hurry, and look for the product that best suits your needs.

• Financial Express
• 03/12/2022