Guide to Life Insurance
Life insurance is the core of every financial plan. But, still, people are unable to comprehend it easily because of its complexity. With proper information and a little bit of research, you can simplify the buying process and arrive at the right choice for you and your family.
If you are the only breadwinner of a family and your family completely depends on you financially, then life insurance should be your top priority. Life insurance will ensure that your dependents will not have to suffer financially, in the case of your unexpected death and can lessen financial burden when your family is dealing with a loss of loved one. Life insurance also helps your dependents to cover the costs of final expenses, outstanding debts, and mortgages, planned educational expenses and lost income.
Source: PolicyMantra.com
Here are few facts about life insurance that can help you to make a right decision:-
When you decide to invest in a life insurance plan, it is imperative that you understand your financial status, your future liabilities, and commitments and then opt for a policy that can help fulfill your future needs.
Life insurance is a contract
A policy is a contract between two parties — life insurance company and the insured- wherein insured person promises to pay fixed sum called premium and insurance company promises to give pre-agreed compensation called claim or death benefit to your nominee in case of the happening of a certain event.
You can also avail tax benefits under section 80C of the Income Tax Act, 1961, on the premium paid for life insurance and under section 10(10D) of the Income Tax Act on the maturity amount.
The first step is to understand types of life insurance plans and how they work so that you can decide which plan can help to meet your needs in long-run.
Types of Life Insurance Policies
Term insurance: It is the simplest, least expensive and most widely applicable type of life insurance. It is a pure plain vanilla protection cover without an element of investment. It offers financial protection for a specific tenure. In the case of death of the policyholder, his nominee will get the sum insured to lead a financially secured life. However, if you survive the policy tenure, you have to forgo the entire premium.
Endowment insurance plan: It offers dual benefit of life cover along with saving component. It usually gives returns much like debt instruments. A certain part of the premium is allocated towards sum insured and rest is invested. It gives a lump sum amount after the policy tenure or on the death of the policyholder, whichever is earlier.
Moneyback insurance plan: It offers periodic payouts to help you meet financial goals at regular intervals. In the case of the death of the policyholder, the insurance company pays the full sum assured along with survival benefits.
ULIP: Unit Linked Insurance Plan (ULIP) offers life cover with an investment component. However, it offers investment options much like mutual funds. Since it is linked to the market, a return is not fixed. ULIPs also give flexibility of switching between equity and debt funds. It helps to create wealth in long term.
Whole-life insurance plan: These plans offer life cover for the whole life of the policyholder or up to 100 years, whichever is earlier. It also offers dual benefit of insurance and investment. It has investment component much like bonds or CDs but backed by the insurance company.
Decide how long you want the policy to cover you
After deciding type of life insurance plan that you want to purchase, next step should be to decide the term of the policy. The term of your policy should be until the age you are planning to retire.
Decide the amount you need to be covered for
You should decide the amount you need to be covered for. If your cover is insufficient to meet your present liabilities, your dependents will have a hard time to make their ends meet in case of your death. And if you take very high life cover, you will end up paying very high premiums which are a waste of money.
Generally, your life insurance cover should be ten times of your annual income plus outstanding loans such as a home loan or car loan plus major future financial expenses such as your children’s education and marriage plus inflation.
You can further enhance your cover by attaching rider or add-on cover with your life insurance policy. It offers financial protection over and above the basic sum insured against an eventuality. These riders can be bought for a nominal premium. Some of the popular riders are critical illness rider, disability rider, and premium waiver rider.
Get life insurance quotes
Getting life insurance quotes is very important as different insurers have different premiums for a specific amount insured for a certain period with certain exclusions for a certain age. If you choose to avail of insurance riders than the life insurance quotes will increase and this increase will not be uniform amongst various insurers. Asking for life insurance quotes can save you a lot of money over the policy term.
Study various life insurance quotes
After getting various insurance quotes, go through them minutely. Understand what every policy covers as well as its exclusions. Then shortlist few policies that fulfill your requirements, then, find out about the customer service of the shortlisted insurance companies.
There are many policy comparison websites which perform this analysis for you within few minutes like PolicyMantra etc
It is always advisable that you go for less complicated life insurance policy so that you can comprehend it easily. Before buying any life insurance policy go through its terms and conditions thoroughly.
Life insurance is the most important insurance plan for any person who has dependents to look after. Life insurance will give you peace of mind because you can rest aside knowing that your family is financially secured even in the case of your mishap.
