When it comes to financial instruments, in the past few years, things are becoming more and more complex because of the large variety of schemes offered by financial institutions. Life insurance is not any exception.
Thanks to the current pandemic situation for teaching us the value of life and its insurance in case of an unwanted crisis. As always, I will try to breakdown all bits and pieces involved with life insurance most easily.
First of all, what is life insurance?
Life insurance is a contract between policy provider firm and policy-holder, where policy provider promises to pay a sum of money to policy holder’s family in case of death of policy-holder. In return policy providers charge a premium to policy-holder. However, currently available policies provide many other things with the above-mentioned money. We will discuss them later.
Who should buy life insurance?
Before answering it, I want to mention that, life insurance is different from health insurance, and everyone should not buy it.
Only ‘bread earner’ of the family, on which others are dependent should insure his / her life. If a person is earning but nobody is dependent on him/her, then there is no sense to buy life insurance for him, because in case of any trouble with his / her life, nobody will sleep hungry.
What should be an insured amount?
Ideally, one should buy a policy that will insure 15-20 times their current annual salary. For example, if you are earning ₹10 lacs per annum, you should buy a policy that will provide ₹1.5 – 2 crores to your family.
The logic behind this is that in your absence, your family should sustain themselves for at least the next 15 – 20 years.
However, buying policies with more return can increase your premiums, one should consider this as well.
When to buy it?
Simple answer, as early as possible. The premium of insurance is fixed when you buy it, which means that you will be paying the same amount throughout your tenure.
For example, if your insurance’s premium is ₹1,000 per month right now, it will remain the same for all your installments. According to the time value of money, after a few years, this amount will hold less value and it won’t hinder you much.
What should be the tenure of insurance?
There are many types of insurance in the market, some are life-time insurance (which means that your family will receive insured amount irrespective of your age at your death) and some insurances have expiry year according to your age which is also known ass term plan.
Usually, life-time insurance charges heavy premium comparing to term plans. To reduce the extra burden of premium, one should buy term plan insurance up to the age, when he/she believes that nobody in his / her family would be dependent on him/her.
For simplicity, you can trust that, when you will touch the age of 60, your children will be self-depended and your death won’t affect them financially.
Some important Riders on insurance?
You can consider riders on insurance as toppings on a pizza. They are add-on schemes, which covers various situation along with insurance.
Disability rider is one of the most important of them as far as life insurance is concerned. It gives your family the insured amount if you face any physical and mental disability and you are not able to work & earn anymore.
Exploring various riders and selecting according to your need is a must. However, one should note that adding rider in your insurance plan will increase the premium a bit.
How to select an insurance company?
Apart from brand value, one must look at the claim settlement ratio of each company. The claim settlement ratio provides the percentage of approved claims by the company. A good ratio is above 95-96%.
There is another important parameter which is known as the amount settlement ratio, which gives an idea of how much amount company paid concerning the amount claimed.
You can use platforms like policy bazaar to compare different plans of various companies.
As a final note, insurance is important and life insurance is an absolute need. I wonder why insurance on a new vehicle is compulsory (applied by the government) and life insurance is considered to be a luxury?
Let me know if you want a simple explanation of health insurance as well. Till then, subscribe to FinBus to never miss on important updates. Goodbye, Stay safe!
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