There are two types of insurance products on the market right now: traditional term insurance plans and others. All 'other' insurance products would either be market-linked or offer guaranteed returns that are roughly similar to the level of fixed deposit rate of return. If you are on the lookout for an ideal term insurance plan, follow one basic rule: keep your insurance separate from investing or retirement planning. This will allow you to realize the full benefits of insurance as a product, including higher life coverage at a nominal premium rate. Purchasing the correct term insurance may not be an easy procedure, and your decision should be based on a number of considerations that we have listed below:
Coverage amount: The highest life coverage that can be obtained is 20-25 times your annual gross income. However, in order to calculate the appropriate coverage amount, a good starting point is to estimate your family's annual expenses depending on your standard of living and lifestyle and add the projected inflation rate.
Policy duration: The main goal of purchasing an insurance policy is to ensure that your dependents are financially protected upon your death. So, for example, if you have a two-person family and your partner is financially independent, purchasing insurance is unnecessary provided you do not any loan responsibilities. However, if your family has more than two members, your children will be financially dependent on you until they are at least 25 years old. And it should be the optimal duration of your insurance policy.
Find the claim settlement ratio of companies: When shopping for term insurance plans, the claim settlement ratio is an important factor to consider. What is the claim settlement ratio? You could ask. This ratio represents the percentage of cases in which the insurance company paid the sum assured out of the total number of claims received by the company. For example, a claim settlement ratio of 95% indicates that the company has honoured 95 out of 100 claims filed. Consider this ratio while reviewing an insurance company's claim to provide financial stability to your family in your absence.
Amount settlement ratio: While many insurance companies focus on the claim settlement ratio, the amount settlement ratio is an equally essential indicator. For example, if an insurer resolves 99 out of every 100 claims received, its claim settlement ratio is 99%. If a company settles ₹95 crore out of ₹100 crore claims, it has a 95% settlement ratio. As a result, a company is likely to pay 99% of the claims it receives but may reject one claim that requires a larger settlement amount, lowering its total settlement ratio. As a result, it is critical to consider both parameters when selecting an insurance firm. The amount settlement ratio can be obtained straight from the Insurance Regulatory and Development Authority of India's annual report.
Save on your tax burden with term insurance payments and additional riders: You can deduct the premiums for your life insurance term plan under Section 80C of the Income Tax Act. You might also consider adding additional riders to your term insurance plans. Adding riders is beneficial since the higher premiums you pay for all of these riders will allow you to save on your tax bill.
For example, if you choose a life-related rider such as an 'accidental death benefit', your premiums will be eligible for deduction under Section 80C. On the other hand, if you choose a health-related rider such as a 'critical illness benefit', your premiums will fall under Section 80D. This clause allows an additional deduction of up to Rs 25,000 (Rs 50,000 for senior persons) on the premium paid for a health insurance policy.
Riders: A policy normally includes four riders: premium waiver, accidental death benefit, critical illness rider, and terminal illness rider. One of the most essential riders is the premium waiver, which waives the premium if you are diagnosed with a pre-defined condition for a small additional fee. All other riders may be selected based on your particular requirements, but they can be skipped if you have a comprehensive health insurance plan and a sufficient emergency reserve.
Prepayment: Once you've considered all of the above factors, the ultimate decision should be on payment methodology—whether you want to pay the premium for the following five years, ten years, until retirement, or until the policy expires. It is generally advised not to go beyond retirement age because the steady financial flow in the form of income ceases subsequently. The early prepayment option (five years, ten years, etc.) may appear more appealing because the amount paid in absolute terms is lower than the amount paid until policy duration or retirement (at the age of 60), but it is also important to consider the time value of money before drawing any conclusions. It is recommended that you analyze the present worth of future payments under various scenarios and then make the most financially viable selection.
Other important factors should include how smooth the claim settlement process is, as you do not want your family members to be burdened by any company's operational inefficiencies. This implies you must ensure that you are working with a large company in terms of the number of claims it handles and whether it has adequate paid-up capital to maintain its successful operation in the long run.
Finally, in this day of systematic investment plans and stock investing, purchasing the correct term insurance plan product is more crucial than ever before you begin making other investments since it mitigates the risk of your life and provides a sense of security and independence.
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