Things to Check before You Buy Life Insurance Policy
A life insurance policy is a contract between an insurer and a policyholder where the former pays the latter’s nominees a sum after the latter’s demise. If the policyholder survives the term period, they may get a maturity amount. This benefit applies only to certain types of life insurance policies.
Policyholders only receive the benefits of a life insurance plan if they pay regular premiums. That’s why choosing a premium that one can pay effortlessly is essential.
Although life insurance policies provide several benefits, it is vital to check a few things before choosing a policy.
Things to Check before Purchasing a Life Insurance Policy
Here are the things you must check before buying a life insurance policy:
Your Family’s Financial Needs
The financial requirement of your family is an essential factor that will determine how expensive life insurance you should get. To understand the financial expenses, consider all sorts of household needs like children’s education, medical and daily expenses. In addition, future household needs of the family, like home renovation, modifications and repairs, and lifestyle expenses, are other essential factors to consider.
The sum assured of a life insurance plan should be large enough to cover these expenses as per the present estimate. You will also require additional coverage to account for inflation. Certain life insurance policy providers offer the option to increase coverage with time or important life stages.
Family’s Financial Needs In Breadwinner’s Absence
A regular monthly income makes it easier for families to meet their expenses. But, if you are the sole breadwinner, you need to figure out how much your family will require in your absence. If your life insurance policy only offers a lump-sum payout, reinvesting the proceedings to generate a monthly income is a good idea.
To secure your family’s future, you must first decide the income amount and its accompanying growth rate. Then, consider dividing the total sum assured of the life insurance policy into a lump sum component and an investment for regular income. The invested sum will be a fixed, steady income to your family, while the lump sum will help them fulfil immediate financial needs.
Features Offered by the Life Insurance Policy
You need to check the additional features offered by multiple life insurance policies before zeroing in on the one most suitable. It can include add-ons like critical illness cover, accidental disability cover, child support benefits and waiver of premium option.
You must pay an extra premium to purchase these riders for additional financial protection. You should also check whether the policy provides options of return of premium, extra maturity benefit and discounts on premium.
Another thing to check is the credentials of the insurance provider before buying a life insurance policy. Check the insurer’s claim settlement ratio, solvency ratio and AUM (Assets Under Management). The claim settlement ratio shows the number of claims settled by the insurer against every 100 claims. The higher the ratio, the lower the chances of claim rejection.
The solvency ratio indicates how well an insurer can settle its long-term debts, i.e. it acts as an indicator of a company’s financial stability. A high solvency ratio shows that a company can comfortably meet its claims. The current market value of all funds a company manages is the AUM. A high AUM indicates that a portfolio is performing well.
You need to know the cases covered and excluded by your life insurance policy. For instance, life insurance policies do not cover deaths caused by dangerous, adventurous sports like skydiving and dirt racing. Moreover, deaths caused by terrorist attacks, riots, narcotics and alcohol are not covered.
Hence, you should thoroughly examine the terms and conditions written in the policy document before purchasing a life insurance policy.
Life insurance policies provide financial protection, tax benefits, wealth protection, and distribution. But, most importantly, it financially supports the policyholder’s family in case of an unfortunate event. But, people need to consider a few factors like additional features, financial needs, insurer’s credentials and policy exclusions before buying a life insurance policy.
Frequently Asked Questions (FAQs)
What are the different options for paying the premium of life insurance policies?
Insurance providers offer multiple options for premium payouts. For example, you can pay the policy premiums annually, semi-annually, quarterly or monthly. A one-time premium payment is also available for certain life insurance policies.
What will happen if I don’t pay the premium on time?
The answer to this question may vary from one insurer to another. Generally, a company allows for a grace period of up to 30 days from when the premium amount was due to be paid. For example, if you pay the premium monthly, the grace period is 15 days.
The policy becomes defunct, and you can only claim its benefits if you pay the premium within the grace period.
What are the tax benefits of buying life insurance policies?
Section 80C and section 10 (10D) Income Tax Act provide tax benefits for life insurance policies. You can claim deductions of up to ₹1.5 lakh under section 80C for paying premiums of life insurance policies. Under section 10 (10D), the amount you will get upon maturity will be tax-free if the premium does not exceed 10% of the sum assured.
How do I decide the amount of life insurance I need?
Life insurance amount depends on an individual’s income, standard of living, financial goals and spending habits. Therefore, an essential factor that should be considered while deciding life insurance amount is your family’s present financial liabilities. Still, as a rule of thumb, You should have a life insurance cover of at least 10 times your annual income.