Insurance products currently available in the market can be broadly categorized into two types—a pure vanilla term insurance plan and others. All ‘other’ insurance products would either be market-linked or provide guaranteed returns which are generally equivalent to the level of fixed-deposit rate of returns.
A simple rule should be followed when buying an insurance product—keep it separate and don’t mix investment or retirement planning with it. This will enable you to reap the maximum benefits of insurance as a product, one that has a higher life cover amount and ultimately lower the premiums. Buying the right term insurance may not be an easy process and your decision should be based on a combination of multiple factors.
Cover amount:
The maximum life cover than can be taken is 20-25 times of your annual gross salary income. However, in order to determine the right cover amount, a good starting point is to estimate the amount of annual expenditure required by your family based on your standards of living and lifestyles.
Policy duration:
The ultimate objective of buying an insurance policy is to ensure that your dependents are covered financially after your death. So, for example, if you are a family of two and your spouse is financially independent, then buying insurance does not make sense. However, if your family comprises more than two members, then your children would be financially dependent on you till they attain the age of at least 25 years. And, that should be the ideal duration of your insurance product.
Amount settlement ratio:
Many insurance companies harp on their claim settlement ratio but an equally important metric should be the amount settlement ratio. For instance, if an insurer settles 99 of the 100 claims it receives, then its claim settlement ratio is 99%. In case a company settles Rs. 95 crore of the total Rs. 100 crore claims it receives, then its amount settlement ratio is 95%. So, there is a high possibility that the company settles 99% of the claims it receives but might reject one claim that entails a higher amount to be settled, thereby reducing its amount settlement ratio. Therefore, it becomes important to check both the metrics in tandem before finalizing on any specific insurance company. The amount settlement ratio can be directly checked from the annual report of the Insurance Regulatory and Development Authority of India.
Riders:
There are typically four riders associated with a policy: waiver of premium, accidental death benefit, critical illness rider, and terminal illness rider. The waiver of premium is one of the most important riders—it waives of the premium in case you are identified with any pre-defined illness and comes at an additional minimal cost. All other riders may be chosen as per your specific requirements, but can be ignored if you have a comprehensive health insurance plan and keep a sufficient emergency fund.
Prepayment:
Once you have decided with all the above factors, the final decision should be regarding the payment methodology—whether you a want to pay the premium for the next five years, 10 years, till retirement or till the policy duration. Its normally recommended not to go beyond retirement as the constant cash flow in terms of salary stops thereafter. The early prepayment option (five years, 10 years, etc.) may seem more attractive as the amount paid in absolute terms would be lower compared to the amount paid till policy duration or retirement (at the age of 60 years) but it is important to consider time value of money as well before drawing any conclusions. It is advised to calculate the current value of future payments that you would be making under different scenarios and then take a decision that would be more financially viable.
Some of the other important criteria should include how smooth the claim settlement process is as you don’t want your family members to be burdened with operational inefficiencies of any company. This means that you have to ensure that you are dealing with a big company, in terms of the number of claims it deals with, and whether it has good paid-up capital which would ensure its smooth functioning in the long run.
Finally, in this era of systematic investment plans and equity investing, buying the right term insurance product is more important than before you actually start making other investments as it is the mitigation to the risk of your life which would offer a sense of peace and freedom.
