Life insurance is more than simply a financial tool; it is a safety net for your loved ones if you are no longer able to provide for them. In India, where the breadwinner’s premature death sometimes causes financial difficulties for the family, a life insurance policy acts as a pillar of strength. It is an arrangement between you and the insurer in which you pay premiums in exchange for the insurer’s guarantee to recompense your family after your death, providing financial stability.
Why should you consider life insurance? Here are five compelling reasons –
- Financial security
A life insurance policy is a financial protection for your dependents in case you are not around. In this regard, a person who is earning Rs 1 lakh per month and has three dependents should acquire a life insurance policy to support his family in his absence.
- Debt repayment
Life insurance can be used to pay off outstanding debts or loans, which can save your family from being overburdened. For instance, if you have a home loan of Rs 50 lakhs, having a life insurance policy can help your family repay this loan in case of sudden death.
- Long-term investment
Some life insurance policies, for example, endowment and unit-linked insurance plans (ULIPs), are also long-term investment instruments that yield maturity benefits.
- Retirement planning
Pension plans, which are a type of life insurance, guarantee regular income after your retirement so that you can lead a financially free life during your golden years.
- Tax benefits
The premiums paid for life insurance are tax deductible under Section 80C of the Indian Income Tax Act.
Now, let’s delve deeper into the key features to look for in a life insurance policy –
- Sum assured
This is the amount which your life insurance company guarantees to pay your nominee or beneficiary after your death. It is very important to make sure that this amount is enough to cover your family’s future financial needs, taking into account factors such as inflation, education expenses for children, daily living expenses, and any outstanding debts.
- Policy tenure
Life insurance policies have different tenures, normally from 5 to 30 years. Your tenure choice must be based on the current age, retirement age, and age of your dependents. The main point is to guarantee coverage until your major financial obligations are paid.
- Premium amount
This is the premium that you pay to the insurance company, either monthly, quarterly, semi-annually, or annually, to keep the policy active. It is vital that you select a premium amount which is affordable and appropriate for your income, as well as your financial commitments.
- Premium payment frequency
Insurance companies provide the option of paying the premium in different ways. You can decide to pay annually, semi-annually, quarterly or monthly, depending on your cash flow. Choose a frequency that enables you to pay your premiums on time without endangering your financial stability.
- Claim settlement ratio
This ratio is the number of claims settled by the insurance company against the total claims received. The higher the ratio, the better the insurance company is in settling claims, which is one of the key factors to consider when selecting an insurance policy.
- Solvency ratio
This ratio shows the financial capacity of the insurer to settle claims. The Insurance Regulatory and Development Authority of India (IRDAI) requires a solvency ratio of 150% for all insurers. A higher solvency ratio means the insurer is more likely to meet its financial commitments.
- Riders
These are supplementary benefits or coverages that can be added to your usual life insurance policy. The common riders are critical illness rider (which provides a lump sum amount on diagnosis of specified illnesses), accidental death rider (which provides additional sum assured in case of death due to accident), and premium waiver rider (which waives off future premiums in case of permanent disability of the insured).
- Cash value
Some types of life insurance policies such as whole life and universal life, part of your premium is used to develop a cash value gradually. The cash value of the policy can either be borrowed against or withdrawn during the policy tenure, which acts as an emergency fund.
- Investment component
In policies such as ULIPs and endowment plans, a portion of the premium is invested in your choice of funds, which will allow your money to increase over time. This gives the double advantage of life insurance and investment returns.
- Grace period
This is the additional 15-30 days granted to policyholders after the due date to pay their premium, during which time the policy is still active. If the premium is not paid within the grace period, the policy may be terminated.
- Free look period
This is a period (usually 15 days from the receipt of the policy document) during which you can review your policy, and if you are not satisfied, you can return it without any penalties.
- Surrender value
If you decide to cancel your policy before the scheduled time, the insurance company will pay you the amount called the surrender value. Nevertheless, giving up a policy is usually not recommended, as it may result in loss of benefits.
- Policy loan
Some policies, especially those with a cash value component, allow you to borrow a percentage of the accumulated cash value as a loan, which helps you to meet emergency financial needs.
- Revival period
The policy can be revived within a specified period, usually 2 years from the first unpaid premium, by paying the due premiums along with interest and reinstatement charges.
- Maturity benefit
Some policies, such as endowment plans and money-back policies, will guarantee a maturity benefit if the insured person outlives the policy term. This advantage is usually a certain percentage of the total premiums paid or the sum assured, plus bonuses, if any.
To summarise, selecting a life insurance policy is a critical choice that involves careful consideration of a variety of circumstances. Remember that the correct life insurance is more than simply the confidence it gives today; it also ensures financial security for your family in the future. So, select cautiously, for your decision now will influence your family’s future.
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