Updated on Jan 20, 2021.
Life is so unpredictable that no one knows what will happen in the next second.
Life insurance is a good solution (if not the best) to make a financially secure future for your family. You won’t worry anymore about your family’s future and you can enjoy a stress-free life.
But before buying any life insurance policy, you must know some important facts related to life insurance. These facts will help you at different stages of your insurance policy.
In this article, I listed 11 important things that you must know before buying life insurance in India. Let’s start…
#1. Life Insurance is A Risk Coverage Tool Not An Investment
I think you should know one most important Personal finance lesson, “Keep your insurance & investment separate”. Hope, you understand, what I want to say.
Because if you go with a mix of both, the policy will neither fulfill your insurance needs nor the investment expectations.
For example, if you need a life insurance coverage of 1 crore, you need to pay a huge annual premium in investment cum insurance policy. May be your present financial condition doesn’t support this.
In this case, you go with low coverage that will not fulfill your insurance requirements. On the other side, you earn the least interest as compared to other investment options. Your investment expectation would not be completed.
If you are looking for an investment plan also, this article would help you 11 Best Investment Options in India.
How Much Coverage You Need
How much coverage will be sufficient to pay your family’s future bills? I think many people find this as the most difficult thing to decide. A different person suggests different methods to calculate the coverage.
One simplest method is, multiple your present income with a number say 10 or 20 and the resulted figure will be your coverage figure. But you should make a comprehensive calculation to finalize the coverage amount.
You should consider your future goals like own house, children’s education & marriage expenses, household expenses, medical insurance expenses, emergency fund along with current loans and EMIs. After calculating a figure subtract your current asset value.
You come with a figure, but this is based on the current prices. May be due to inflation, this amount would fall short. So, increment the figure with an inflation rate. That final amount should be your coverage.
Disclose Everything While Applying
Insurance companies do their work on the basis of seven insurance principles. The first principle is “Principle of Uberrimae Fidei or Utmost Good Faith” that implies, the insurance contract must be signed by both parties (insurer and insured) in absolute good faith.
The person getting insured must willingly disclose to the insurer his complete true information regarding the subject matter of insurance. The insurer’s liability gets legally canceled if any facts, about the subject of insurance, are either omitted, hidden or presented in a wrong manner by the insured.
For example, in case of life insurance, if you are an alcoholic or smoker and you didn’t disclose this matter to the insurer. Later on, if alcohol or smoking becomes the cause of death, the insurance company will not pay any claim to the family.
So it is advisable to disclose all the facts about your health and habits to the insurance company on application.
If You Have Life Insurance From Employer
Most companies give their employees a certain amount of coverage for free in group life insurance. For most of families, the coverage amount is not sufficient.
Even if your employer’s insurance did cover your family’s needs, you would be left with no coverage if you quit or get laid off. What will your family do, if any uncertainty happens with you during this period?
To avoid such conditions in life, it makes more sense to buy your own policy because it will be with you as long as you pay the premium amount.
#2. Things to consider about Premium
Premium Must Be Affordable
You have to pay a certain amount of premium at regular intervals. The premium amount directly depends upon the coverage. Higher the coverage amount, the higher the premium you have to pay.
Before buying a life insurance policy, make sure that the premium amount must be affordable as per your present financial conditions. Even If the premium increases later, still you will be able to afford it.
Ignorance about premium may harm your present financial conditions.
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The next deciding this is how often you can afford to pay the policy premium. You can either pay the entire premium amount in a lump sum or you can pay it at regular intervals like monthly, quarterly or annually.
Premium amount is also differentiated on premium paying frequency. You have to pay the least premium in case of lump sum followed by annually, quarterly and monthly.
But the frequency of your premium should be based on practical assessment of your financial situation, keep that in mind will be more convenient for you.
Select Add-on’s wisely
Add-on is a feature of adding some additional services like accidental insurance, critical illness insurance or health insurance with life insurance. These add-ons are also called riders.
Insurance companies charge an additional premium for providing add-ons. But sometimes getting an add-on becomes more expensive than the two separated plans. So before adding an additional service compare the premium amount with the separated plans.
#3. Claim Settlement
The major responsibility of your insurance company is to pay claim amounts and deliver maturity benefits without any delay.
Just like insurer check your credit score before making a commitment, make sure that you also check the claim settlement ratio of the insurance companies & give preference to insurer having a higher ratio.
You can check the claim settlement ratio on the IRDA website (Insurance Regulatory & Development Authority) free of cost. You should also read reviews about the insurer on different portals.
Tenure of Life Insurance
Tenure of insurance policy plays a very significant role during application time. Premium also depends on the tenure of the policy. Longer the policy tenure, the more the premium you have to pay.
But the main question is, what should be the ideal tenure for a life insurance policy?
There is no one figure answer of this question, but you can choose any policy tenure on the following basis
- A maximum tenure that policy allows. Like maximum tenure can be 25 years till the age of 60 years.
- The retirement age minus your current age can also be considered as the tenure of the policy.
- Insurance policy till the age you would complete your all financial responsibilities towards your family.
Choose Your Beneficiaries Carefully
Choosing the right beneficiaries can make the difference between a smooth transition or a drawn-out legal process if you pass away.
Parents make their children the direct beneficiaries of their life insurance policies. Most life insurance companies will not pay out a death benefit to a minor, so a guardian will have to be appointed to control the money until the child reaches the age of majority.
Choosing the right beneficiaries before you buy a policy and reviewing them periodically after a policy is in force is very important. Most of these issues can be addressed on trust basis.
Read Insurance Policy Carefully
It is very important to carefully review the terms, coverage premiums, benefits, renewals and termination clauses of the policy before buying it. There are some basic things you should know about your policy like
- Do premiums or benefits vary from year to year?
- What is interest rate paid on premium amount and what is the procedure to get the maturity benefit (in case of insurance with maturity benefits)?
- The time period for providing the insurance benefits to beneficiaries in case of untimely death.
Your beneficiaries should also have information about your insurance policy and its terms and conditions. This will make the claim procedure easy.
#4. Research online
Every life insurance company offers a number of insurance plans having different or some same features. Then which is policy best for you? Maybe all or may not be. You can research online and compare the relevant insurance plans of different insurance companies.
Make a list of all your expectations and compare them with the policies. Go with the policy that fulfills your more expectations.
In most of the case, the agents try to influence your decision towards some specific policy because of their higher commission benefit. Be aware of such situations.
Check Policy Premium Online
Insurance companies pay a decent amount of commission to their agent for selling the policies. On the other side, Every insurance company sells policies online at discounted rates because of selling over the net saves the agent commission and bring down the overall cost of the policy.
So always compare the offline policy sold with the online available policy. This can save up to 10% of your premium amount. This is a money-saving tip for you.
#5. Choose Your Agent Carefully
If you are still want to buy life insurance through an agent, then don’t do blind trust in any agent. There would be some hidden terms about the policy that you have to know but a broker may hide to sell the policy.
So make sure the broker is fair enough that he would reveal all the hidden facts about the policy (practically difficult to find such a broker ). With all Make your own research about the policy, ask from past customers about their experience with the insurer.
You may also like to read, How much commission an LIC agent Earns.
#6. Policy Renewal Process
You can renew most insurance policies for one or more terms even if your health has changed. Each time you renew the policy for a new term, premiums may be higher because of risk increase with age increase.
Ask what the premiums will be if you continue to renew the policy. Also, ask if you will lose the right to renew the policy at a certain age. These are very important questions to know because at an older age may be other insurers would not provide insurance to you.
#7. Review Your Policy Every Few Years
Review your life insurance policy every 2-3 years. Ask some questions from yourself, How will inflation affect your future needs? Do you need more insurance when your family size increases or for your future plans?
You can also consider the factors when some financial responsibilities are fulfilled like, your children complete your study and get married, you repaid your loans. At that time, you would not need the present life coverage.
You can also discuss with your agent to make changes in your policy with the change in your income and needs.
#8. Need for Life Insurance
The main purpose of life insurance is to provide financial security to dependent spouse, children or parents in case of any uncertainty.
But, what if you are financially independent, and no one is financially dependent on you? Do you still need life insurance?
In such a situation, you don’t need to have life insurance unless you consider life insurance as a strategic financial tool & you won’t leave a gift of a lump sum amount for your independent family members. The choice is always yours.
#9. Never Forget to Pay Premium
If you don’t make timely payments as per the insurance policy, the insurer may cancel your policy after a certain period. Your all past year’s premium goes down into the drain.
Generally, insurers allow making the late payment within a specified period, even in this case you have to pay the late payment charges which will increase your insurance cost.
So, Consider having auto-payments from a checking or savings account to make sure you don’t miss an important deadline.
#10. Tax Benefits
The Indian government also encourages life insurance through their inclusion in the deductions that can be availed under Sections 10(10D) and 80C of the Income Tax Act.
An individual can claim the deduction for premium paid for life insurance up to a maximum of 10% of sum assured under sec 80 C. You can save more tax by Investing in 11 Best Tax Saving Investments in India.
Even the claim amount in case of death of the policyholder is totally tax-free for the beneficiary under sec 10(10D).
I found these points that you should know before buying health insurance. If I missed anything in this article, let me know