“What will happen when I die?” No. This isn’t a theological question. We are more focused on the financial aspect of this question. What happens to your dependents and your family and how will they handle the financial gap created by your absence?This is where life insurance policies come in.
India is the 5th largest life insurance market in the world. The industry is growing at 32-34% each year.
Addressing the increased awareness about life insurance plans and their role in financially protecting one’s family, several players have emerged in the market. However, before you decide to purchase a life insurance plan, you must develop a better and deeper understanding of the topic.
Here’s our take on life insurance - the What, the Why, and the How.
The What:
What is Life Insurance?
Life insurance is a financial contract between an insurer and the policyholder. This tool extends financial protection to the family of the policyholder and offers a lumpsum amount in case the policyholder passes away during the tenure of the plan.
Heads Up: It takes an average person up to 5 hours to read & analyze a policy, and 10 hours or more to compare different plans and make a decision.
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What are the Different Types of Life Insurance?
There are multiple types of life insurance plans -
- Term Life Insurance Plan - This type of life insurance offers pure and comprehensive financial protection for a fixed tenure (10, 20, 30, 40 years). In the event of the policyholder’s death, his/her family receives death benefits (with no tax deductions as per Section 10(10D)). Additionally, you have multiple riders that you can opt for, which can help you customise the plan and ensure that you make the most of your policy.
- Whole Life Insurance Policy - This is a life insurance plan. But in this case, the tenure extends till the policyholder is 99 years old. Additionally, there may also be a cash component associated with your payouts.
- Unit Linked Insurance Plan (ULIP) - ULIP or Unit Linked Insurance Plan is a unique policy that extends a blend of investment and financial protection. The premium paid towards this kind of life insurance plan is split into 2 parts - a life insurance policy and an investment channel (you can choose the channel from the offering portfolio of the insurer and base it on your risk appetite).
- Endowment Policy - An Endowment Plan is just a term insurance policy with added maturity benefits for the policyholder when he/she survives the policy tenure. However, with this type of policy, the premiums tend to be pretty steep since the insurer will be paying you whether you survive the policy or not.
- Retirement/Pension Policy - Retirement insurance plans, as the name suggests, are a set-aside corpus that comes into use during retirement years. The amount is disbursed in the form of monthly pensions or as a lump sum, as preferred and acts as a financial cushioning
| Types of Life Insurance Plans | Premium Flexibility & Affordability | Risk Level | Investment Option | Recommended or Not |
|---|---|---|---|---|
| Term plans |
|
No risk | No | Recommended |
| Whole life |
|
No risk | No | Not recommended (less chances of dependents till you reach 99 years, so no need for a life cover) |
| ULIPS |
|
High risk | Yes | Not recommended (Combining protection and investment is never a good option. Returns are dependent on market fluctuations.) |
| Endowment |
|
Low risk | Yes | Not recommended (higher premiums due to assured disbursal whether you survive the tenure or not.) |
| Retirement/pension |
|
Low risk | Yes | Not recommended (savings would be a better option) |
What are the Best Life Insurance Companies in the Market?
| Best Life Insurers | Claim Settlement Ratio | Amount Settlement Ratio | Complaints Per 10,000 Claims |
|---|---|---|---|
| Max Life Insurance Co. Ltd. | 99.40% | 95.5% | 7.0 |
| Bajaj Allianz Life Insurance Co. Ltd. | 98.85% | 93.0% | 5.0 |
| Tata AIA Life Insurance Co. Ltd. | 98.53% | 92.7% | 2.3 |
| HDFC Life Insurance Co. Ltd. | 98.69% | 87.3% | 2.7 |
| ICICI Prudential Life Insurance Co. Ltd. | 97.09% | 92.1% | 14.3 |
(*The Amount Settlement Ratio, Claim Settlement Ratio and Volume of Complaints mentioned above are all averages of the last 3 years to extend a more comprehensive understanding of the insurer)
The Why:
Why Should You Opt for Life Insurance?
- Financial security - Life insurance policies are specifically crafted to serve as your financial replacement when you pass away. The calculation of your sum assured is based on the number of dependents you have, the probable life-stage developments that would require substantial funding, and the existing financial liabilities. Such financial planning in anticipation extends comprehensive security and protection for the family.
- Tax benefits - To boost the life insurance penetration in India, insurers offer policyholders a diverse host of tax benefits, namely -
| Income Tax Act | Tax Benefit Details |
|---|---|
| Section 80C |
|
| Section 10(10D) |
|
| Section 80CCC |
|
- Provisions for loan - In the case of a few life insurers, policyholders can treat their policy as collateral and avail of a loan to fund his/her child’s education, or any other life development, or meet any urgent financial liability.
- Coverage for health expenses - If you have opted for value-adding riders like Critical Illness Benefits or Terminal Illness Benefits, then your insurer will fund your treatment charges.
- Critical Illness Benefit - In case the policyholder is diagnosed with any of the listed (in the policy wording) critical ailments, the insurer offers a sum (maybe above the base amount or a part of it) as a lump sum or partially. This sum can then be used to treat the condition or be set aside for other financial requirements, as he/she sees fit.
- Terminal Illness Benefit - in case you are diagnosed with a terminal condition and your doctor declares in written format that you have a few months to live, the insurer will disburse you the complete cover amount. This sum can now be used to treat the ailment or fund any other expenses.
- Returns to boost your wealth - In some life insurance policy variants (like ULIP), insurers offer assured returns on the premiums. Needless to say, such investment scopes help you build on your finances.
However, blending financial protection and investment under a single tool is never a good option. On the one hand, financial protections are supposed to be a sure shot and safe-fail cushioning to serve as a replacement and rush to help during dire circumstances; on the other hand, investments bring forward a risk tolerance factor. The latter not only risks the maturity and death benefits (that could have been disbursed in full) but also spikes the premium significantly.
What are the Drawbacks of Life Insurance?
Life insurance plans, in general, do not have much of a drawback. However, since these policies are all about offering easy and affordable access to a significant cover amount, any misstep on your part may result in a financial disaster. So, while availing of life insurance plans, here are a few tips that you need to remember -
#Tip 1. Do not opt for life insurance policy types that combine vanilla life insurance with any investment option.
#Tip 2. Do not fall for all available riders since not all of them would cater to your customised requirements.
#Tip 3. Use a free life insurance cover calculator to compute the ideal cover. Anything less or more will have dire financial consequences for your family and loved ones.
#Tip 4. Read into the life insurance policy documents and wordings and focus on the fine print of the same. Check for exclusions, terms and conditions, etc.
#Tip 5. If you can predict the need for urgent liquidity in the future, life insurance policies are not your calling.
The How:
How to Avail of Life Insurance Plans?
| Step 1 | Assess Your Needs - Determine your financial goals and needs for life insurance coverage. Consider factors like outstanding debts, income replacement, education expenses, and long-term financial security. |
|---|---|
| Step 2 | Research Insurance Companies - Research the best insurance companies to find reputable entities with a strong financial rating. Compare the types of life insurance policies they offer and their premiums. |
| Step 3 | Calculate Coverage Amount - Calculate the amount of life insurance coverage you need based on your financial goals and needs. This calculation should consider your current debts, future expenses, dependents, and any existing savings. |
| Step 4 | Choose the Right Type of Policy - Decide whether you need term life insurance for a specific period or permanent life insurance that lasts a lifetime. Consider factors like affordability and the level of coverage required. |
| Step 5 | Request Quotes - Contact insurance companies to request quotes for the type of policy and coverage amount you've chosen. Compare quotes to find the most suitable and affordable option. |
| Step 6 | Review Policy Details - Carefully review the policy terms, conditions, and any riders (additional coverage options). Ensure you understand the premiums, payment schedule, and policy benefits. |
| Step 7 | Undergo a Medical Examination - Some policies may require a medical examination to assess your health. Cooperate with the insurance company's requirements during this process |
| Step 8 | Fill Out an Application - Complete the application provided by the insurance company accurately and honestly. Provide all required information, including personal and financial details. |
| Step 9 | Wait for Approval - Submit your application to the insurance company. Wait for the underwriting process to be completed, which includes a review of your application and medical examination results. |
| Step 10 | Make Premium Payments - If approved, make regular premium payments as specified in your policy. Ensure payments are paid on time to keep the policy active. |
| Step 11 | Receive Policy Documents - Once your policy is issued, you will receive policy documents. Keep these documents in a safe place and inform your beneficiaries about the policy. |
(Please note that the specific steps and requirements may vary depending on the insurance company and the type of policy you choose.)
How to Choose the Best Life Insurance Company and Plan?
How to choose the best life insurer?
As a potential life insurance policyholder, your first stop must be seeking an ideal insurance provider since their reputation and credibility are a step towards assured payout and hassle-free claim settlement.
- High Claim Settlement Ratio - Claim Settlement Ratio (CSR) reflects an insurer’s credibility and consistency in meeting claims. It’s calculated by -
(Total no. of Claims Approved/ Total no. of Claims Received) x 100
Thus, the higher the CSR, the better the reputation and assurance an insurer holds and extends towards settling claims. This is specifically beneficial in the case of life insurance plans since the cover amount is substantial and the condition of disbursal often involves the death of the policyholder.
Any CSR of 97% or above is ideal!
- High Amount Settlement Ratio - Amount Settlement Ratio (ASR) reflects how effectively an insurer settles claims within a preferred time window. ASR is calculated by -
(Amount Settled / Total Amount of Claims Received) x 100
The higher the ASR, the more proof that an insurer is settling claims swiftly and fairly. For life insurance plans, a higher ASR is crucial since you wouldn’t want an insurer who redundantly extends the period of disbursing the death or maturity benefit (since the amount is meant to act as a financial substitute after the death of the policyholder and meet financial goals and requirements of the surviving family/beneficiary.)
Choose an insurer whose ASR is 90% or above.
- Low Complaint Volume - Complaint volumes are calculated as the number of complaints launched for every 10,000 claims registered.
In case you have come across an insurer with more than 20 complaints (based on the average of the last 3 years), it’s best to walk away and find yourself another one. You wouldn’t want to get stuck with an insurer who has had complaints raised against them repeatedly about their claims settled, or regarding their claim assistance.
How to choose the best life insurance plan?
When it comes to life insurance plans, you have a buffet of options to choose from. However, there are a few features that you need to factor in when choosing a life insurance policy -
- Analyse your financial bandwidth (calculate your current financial liabilities and the bandwidth left to pay your premiums).
- Calculate the ideal coverage as per your dependents, financial liabilities, etc.)
- Determine the ideal life insurance policy type that would suit your financial goals and your family’s future requirements.
- Reach out to an insurance expert and sort through the available riders that would best suit your customised financial requirements.
- Compare policies and their respective premiums using free policy comparison tools.
- Go through the reviews and ratings for the policy from neutral websites offering transparent suggestions (Hint: Us!!!)
- Look into the policy details, exemptions, exclusions, and terms and conditions.
- Make sure that you have options regarding premium payment and disbursal modes.
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Conclusion
Life insurance policies are an effective, comprehensive and efficient financial tool that is meant to act as a financial substitute for you when you pass away. Since it’s tasked with funding the financial requirements of the family, it’s always best to keep the life insurance policy a simple vanilla plan. If you want to get into an investment, it’s best to opt for a different channel altogether. This will mitigate the risk on your sum assured and prevent any redundant premium spikes. In case you are looking for a life insurance, term plans are your best bet (affordable premiums extending extensive coverage); and you can always choose a different channel for investment purposes.
However, before you opt for any life insurance cover, please make sure that you have a clear understanding of your current financial liabilities, bandwidth, and future requirements.
