How to Choose Life Insurance?

Thinking of getting a life insurance? Read this article before you pick one.

To prepare for the worst and hope for the best is probably the most prudent piece of advice one can follow in life. These past months during the pandemic have taught us that nothing, especially life, is for certain. As you grow older, there are more people that might be dependent on you, both emotionally and financially, and while nothing can cover the emotional hurt of losing someone you love, fortunately there is something you can do to secure your loved ones financially after you are gone.

Life insurance policies come to your rescue here. In simple terms, these are insurance policies that provide significant monetary support to the next of kin in the case of unforeseen and untimely demise of an individual. But choosing the right life insurance policy for you might be easier said than done with innumerable offers from multiple insurers at multiple premiums offering multiple degrees of covers. With so many options, how do you choose the right life insurance?

How to choose a life insurance policy:

There are 2 basic kinds of life insurance policies, namely term and endowment. To learn more about their definitions, click here. After you’ve decided among these two, here are pointers on picking life insurance that fits your needs and budget:

Age/ number of years till which you are covered

– Your insurance policy terms will tell you till what age or for how many years it will cover you under the chosen life insurance plan.
– For example, Seema picks a plan that covers her for 40 years at the age of 20. This means that her chosen life insurance policy covers her till the time she is 60.
– However, when Seema’s 45 year old mother picks the same insurance plan, she discovers that the maximum age that the plan covers till is 65 and hence she gets cover only for 20 more years. So instead she picks a policy that covers her till the age of 75

The earlier you decide to choose a life insurance policy the better

– Life insurance policy premiums rise exponentially as you grow older. While premiums for a 10 Cr term life  insurance may be limited to 10,000 per month while you’re in your 20s, the premiums might rise 2-3 fold by the time you’re 40-45.
– Hence entering a life insurance policy early is the most prudent decision. Moreover as your premiums are not adjusted for inflation, effectively with each passing month you are paying less and less.

Claim settlement Ratio

– Like any other insurance policy, make sure to check the claim settlement ratio for your life insurance policy provider. Try and go for one which has a claim settlement ratio of above 98%. The last thing you want is your loved ones fighting over the money they deserve after you are gone.

Amount Settlement Ratio

– It is also important to see what percentage of the amount claimed by the insuree is actually settled by the policy provider, so do check this statistic as well before investing. The insurer is obligated to share this information with you should you ask for this. Most people only look at the claim settlement ratio and make their purchase decison. However, the should also consider amount settlement ratio seriously while evaluating a life insurance policy.

Addition of other benefits to your policy

– You can add other benefits to your life insurance policy such as cover for accidental disability, hospital care, payout in case of terminal disease, Cover for critical illnesses etc at a very nominal cost in addition to your premiums. These are highly advisable and a thorough market research is advised to see what each insurer is providing and only then pick the right life insurance for yourself.

Tax Benefits

a. Section 80C
– Section 80C of the IT act of 1961 is one of the most famous tax saving instruments for individuals. Under this section, a maximum taxable income deduction of Rs.1.5 lakh is allowed for all the listed investments and instruments put together. It includes a number of instruments like PPF, EPF, ULIP, ELSS, and payments like repayment of home loan, children’s tuition fees, life insurance premium, etc.
– Therefore, your premiums paid for life insurance can be added to your 80C components and can then potentially give you a hefty tax benefit

b. Section 80D
– Policyholders who have opted for a health-related rider (such as Critical Illness, Surgical Care, Hospital Care Rider) with their term insurance policy, can also avail deductions. Conditions for term insurance benefit 80D include:
– The deduction amount cannot exceed 25,000
– If a policy is bought for your parents you can get an additional taxable income deduction of Rs 25,000. If your parents are senior citizens, this deduction goes up to Rs 50,000

c. Section 10D
– Under section 10D all the money that is received (on maturity/surrender of policy/ untimely death and all associated bonuses)  by the insured or the next of kin is free of tax upto an amount of Rs 1,00,000
– If the amount exceeds Rs 1,00,000 a TDS of 1% is deducted

How to Choose Life Insurnace – Frequently Asked Questions (FAQs)

1. Are deaths by suicide covered by the life insurance policy?
Yes, most insurance policies cover untimely deaths due to suicude. However, this cover kicks in after a certain period of time has already passed and needs to be checked for each policy individually.

2. How do I decide on the coverage amount of the life insurance I need?
Depending on your current standard of living, income, aspirations of family for the future, number of members in the family, number and age of children you should pick the right life insurance policy for you. You should also ensure that the premiums remain affordable for you and you don’t end up financially burdening yourself.

3. What happens if I am not able to pay my premiums for some reason?
You are usually given a grace period of about 30 days to pay your premiums post which your policy stands void and you cannot make any claims. You can restart the policy by paying back all your backlogs.