How to Buy Life Insurance Safely?

Introduction

Insurance is a useful financial product. It is, primarily, designed to compensate for the risk, implicit in the vicissitudes of life. The insurance sector is very vast and there is a multitude of solutions available in the market to cover various dimensions of risk. However, this article focuses on life insurance only.

While buying insurance, the most important question to answer is whether you need it or not and, if you do, what type of insurance you need. I suggest you have a way of knowing it independent of what the insurance companies try to tell you either directly or through their agents.

I will try to cover various dimensions of life insurance in a simple format which should facilitate decision-making at the individual/ family level.

Who Needs Life Insurance and Who Doesn’t?

Any individual, male or female, who is earning and has dependents should think of buying life insurance. On the contrary, anyone who is either not earning or, if earning, doesn’t have anyone to look after financially, doesn’t need it.

For example, if husband and wife are both working and they have three school-going children, both of them need life insurance but their children don’t. If the wife is not working for money, she also doesn’t need it. Moreover, if husband and/ or wife have their old parents living with them, they don’t need life insurance. However, every family member does need health insurance, which is a different subject, not being discussed in this blog post.

How Much and Till What Age?

Anyone considering life insurance should get a policy worth approximately 20 times his/ her average annual income.

You should get insurance up to a time you expect to have dependents. For example, if you expect that by the time you turn 60, your kids will be, financially, on their own, you may get a policy up to 62 years of age. However, if your spouse continues to depend on you and you have yet to retire from work, you may go for a new policy for, let’s say, 10 years that equals 5-10 times your annual income.

When to Buy Insurance?

The best time to buy life insurance is when you start earning a regular income. This may be much before you have any dependents. However, since you plan to get married and start a family, you must buy life insurance as early as possible. Getting insured at a young age is cheaper as you have to pay a lower premium for the same coverage. The second best time is whenever you realize that you need it.

Life Insurance Products and Their Suitability

This is an area where you are not likely to get the best advice from the insurance agents. They are more likely to sell you what suits them the most and disregard your needs. Life insurance solutions are mainly of two types:

Term Insurance

Term insurance is purely an insurance product. You have to pay relatively less premium. The dependent(s) or the nominee(s) will be paid the agreed amount in the event of death of the insured person after verification of the claim. On the expiry of the period of insurance, however, nothing will be paid in a lump sum.

Endowment Plan

It is a hybrid solution with insurance and investment built into one product. The premium is higher than term insurance. The dependents get the amount of the claim in case the insured person dies. On maturity of the policy, a lump sum is paid. This implies that a part of the monthly/ yearly subscription or the premium covers the insurance risk whereas the remaining amount is reckoned as an investment. The company invests this amount in various options and then on maturity of the policy, the invested amount, along with the profit, is paid back to the insured person.

Suitability

Whenever you have to buy life insurance, it is better to prefer term insurance over an endowment plan. This way you will get full risk coverage by paying relatively less premium. What you save on the premium by not opting for an endowment plan, should be invested separately. You may consider mutual funds or direct equity depending upon your knowledge, temperament, and how much time you can spare for your investments. This is because the returns you get from endowment plans are, generally, not good.

Add Ons (aka Riders)

Along with a term insurance plan, you should get two add ons or top-ups: critical illness and disability or accident cover. Normally, these can be obtained by paying slightly more premium. These add ons are meant to cover a contingency where the insured person is alive but unable to work anymore due to an illness or a disability. In both these eventualities, the insured person gets an agreed amount in a lump sum.

Critical illness cover is different from health insurance. This is to compensate for one’s inability to work due to the illness. To pay the medical bills, health insurance is necessary.

How to Choose the Insurance Company?

While selecting the insurance company, a low premium is an important consideration. However, you should also compare the track record of available choices in the market before making a decision. See which company comes on top according to the following criteria:

Claim Settlement Ratio

The insurance company having the highest claim settlement ratio should be preferred.

Amount Settlement Ratio

The claim settlement ratio, alone, can be misleading. Therefore, also see the total amount of insurance paid relative to the amount claimed.

The company that scores highest on both these parameters should be selected.

Miscellaneous Points

Some other points that need to be kept in mind while processing your case are covered here:

Don’t fill the application form in a hurry. Take about a week and read all the details before submitting your application.
Prepare the application youself and be very accurate in filling the details. Any inaccuracy in the information provided can result in complications at a later stage. Make all disclosures needed by the inusrance comapny, including your health profile, correctly.
You should not buy insurance from the agent. Instead, buy online. You will find it cheaper this way. Don’t even ask an agent what you need. Carryout your own research. Make use of internet.
Don’t over-insure. One policy for one person is enough. Mutiple policies from different comapnies may create problems subsequently.
As already explained, never invest in insurance products. Keep insurance and investment separate.

Conculsion

While opting for life insurance, you must see whether you need it or not. Never make a hasty decision. Consult a financial expert or carry out research yourself and then decide. Always keep investment and insurance separate. Be very careful while making disclosures and providing information to the insurer for it is going to have long-term implications.

How did you find this content? Please comment and give suggestions, if you have any.

My other articles you may find useful are:

How to Make a Personal Financial Plan – Basic Considerations

Personal Finance – A Suggested Checklist

Investment vs Speculation

A Brief History of Money

Why I Started a Blog on Personal Finance

Anatomy of Financial Risk

Debt, Equity, and Real Estate: An Overview

Retirement Planning

How to Compare Equity and Real Estate as Investment Options

How Stock Market Works and How to Work in Stock Market?