LIC is India’s largest life insurance company managing assets worth $528 Billion (which is more than the country's Mutual Fund industry) and still, only 3 out of 100 Indians are covered by a life insurance policy.
Why is that?
The main reason is that Indians still have many doubts, fears and misconceptions about life insurance.
Through this article, we hope to clarify all of these!
What is Life Insurance?
Insurance is a contract between the policyholder and the insurance company where the company promises to pay a pre-decided amount in case an unfortunate event occurs.
In the case of life insurance, the insurance company pays a designated amount upon the death of the insured person. In return, the insurance company charges a premium that is calculated based on the plan selected by the policyholder according to their affordability and requirements.
Depending on the contract, other events such as terminal or critical illness can also trigger payment.
Should you consider getting life insurance?
If you have people who are dependent on your income then absolutely yes! In financial planning, buying a life insurance policy is critical to financially securing your family in your absence.
When should you get a life insurance policy?
You should get a life insurance policy as soon as there are people dependent on your income. The earlier you buy it, the lower the premium will be for the entire duration of the policy.
Are there any additional benefits of getting life insurance?
A life insurance policy also helps with tax savings.
What factors to consider before you buy a life insurance policy?
1. The type of policy: Always buy a term life insurance policy as it gives you the benefit of high sum assurance at an affordable premium.
2. Policy coverage amount: Get a cover of at least 10x your annual income or 1 Crore rupees – whichever is higher. When dependents are more or are more critically dependent on your income, the coverage amount should be higher.
3. Settlement ratio: i.e. the number of claims settled divided by the number of claims made to the insurance company – the higher the better!
What are common mistakes to avoid?
1) Never mix insurance with investment. There are plenty of other investment tools for you to diversify your portfolio
2) Create a financial plan for your nominees. I’m sure you have heard of horror stories where the insurance money is distributed among random debtors and the actual nominees are left empty-handed.
To avoid this, plan on how the money will be utilised once your nominee gets it
3) Declare nominee and provide their details clearly. In case of discrepancy, your family may not get the corpus.
I hope you now understand why life insurance is a critical component of financial planning.
When buying a life insurance policy:
- Don't mix insurance and investment by purchasing plans like ULIPs, prefer term life insurance.
- Get a cover that is at least 10 times your income or 1 Crore – whichever is higher.
- Clearly declare and prepare your dependents so they don't get frauded.