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Life Insurance 102 views May 7, 2021
Having life insurance is vital to deal with uncertainties and achieve different financial goals. It comes in several variants – pure term plans that offer you a life cover, plans with life cover and investment benefits, etc. All these plans come with a definite sum assured that your family will get in case of your unfortunate demise. In return, you need to pay the premium to the insurance company for the period you choose to do so. Plans are many and are good too, but not all may meet your requirements.
So, introspect carefully and choose the best life insurance policy for yourself. If you are new to insurance, you can take the help of our market expertise to choose the best life insurance policy. Read on…
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Choosing the best life insurance policy will depend firmly on your requirements, the premium that you can afford, the credibility of the insurer as well as the terms and conditions that you are comfortable with, etc. All these are the central points of choosing a life insurance policy. Let’s focus on these points below.
Requirements can vary among individuals; while some would like to protect their family in their absence, others would want to earn too. The best part is that life insurance policies help meet both. A term insurance plan is the best fit for individuals wanting a protection cover for their dependents after their death.
Upon your death, your dependents will get the sum assured courtesy term insurance, which comes with an affordable premium that also remains fixed throughout the policy term. So, the sooner you buy a term insurance plan, the more you could save over the chosen policy period. As the premium amount remains lower and the coverage remains higher, people looking to secure the future of their loved ones in their absence should choose a term plan.
While choosing a term plan, it is important to gauge accurately the requirements of your family in your absence. So, choose the sum assured based on the inflation that may prevail in the future. Ideally, a sum assured amount should be around 15-20 times your current annual income. So, if your current annual income amounts to INR 7 lakh, a sum assured of 1.05-1.40 crore will stand your family in good stead! You could also look at your current expenses and add inflation of 5-6% a year to calculate the ideal sum assured amount.
Life insurance plans, except term plans, offer investment benefits too. But investments come with a degree of risk too. Like Unit-linked plans (ULIPs) where a policyholder chooses from a list of funds and has to bear the investment risk in the portfolio. You will get loyalty additions and wealth boosters based on the performance of the fund you choose. However, these plans come with a lock-in period of five years during which you can’t withdraw. So if you can bear greater market risks and have a longer investment horizon, choosing a ULIP won’t be bad! But do look at the return of ULIPs periodically to choose the right one.
However, if you score less on risk appetite, the best life insurance policy will then be an endowment plan offering you guaranteed returns on your invested premium. As the name ‘Guaranteed Returns’ suggests, you will get the return amount as promised at the time of buying an endowment plan. Like ULIPs, endowment plans also offer loyalty additions. You can surrender the endowment plan if it acquires a surrender value, which usually happens after a spotless premium payment record for at least 2-3 years.
Life insurance plans come with different policy and premium payment terms. The policy term of a term plan can be as long as 30 years. Some insurers offer term plans for the whole life too. ULIPs and endowment plans can have a policy term of 10-40 years. Also, check whether the insurer offers you flexibility in terms of premium payment. All – Term plans, ULIPs and endowment plans – can have single, limited and regular premium payment options.
See which of these options come with a premium amount you are comfortable with. At the same time, check how much sum assured your family will get in case of your death. Choose a plan that offers the highest sum assured at least premium payment.
Term plans don’t come with maturity benefits unless you buy a policy offering ‘Return of Premium’. So, if you survive till maturity, you would get all your paid premiums with the ‘Return of Premium’ plan. But these plans come with a much higher premium than that of a normal term plan. So, buying a term plan with a return of premium option may not be feasible for most. Whereas, ULIPs can offer greater maturity payouts than that of endowment plans as the former invests in the high risk, high return proposition of equities as opposed to the latter that puts your money in instruments that offer guaranteed, but lower yields.
Tax exemptions are available on premiums payable under term and other life insurance plans under Section 80C of the Income Tax Act, 1961. However, to get this benefit, the premium paid must not exceed 10% of the sum assured. For policies issued before April 1, 2012, one could have availed this benefit even if the premium exceeded 10% but remained within 20% of the sum assured.
Tax benefits also apply to maturity proceeds, subject to the same condition mentioned in the case of premium payments. However, the Union Budget 2021 has come with a regulation implying a 10% tax on maturity proceeds of ULIPs if they are purchased on Feb 1, 2021, or thereafter, with the annual premium exceeding INR 2.5 lakh. Taxes will, however, be levied on the amount above INR 1 lakh. Whereas, no such norms are placed on endowment plans, which offer tax exemptions on maturity proceeds under Section 10 (10D).
Last, but by no means the least, check the claim settlement ratio (CSR) of different life insurance companies before choosing a plan. It determines the efficiency of the insurer in settling your life insurance claims. The ratio is derived by dividing the number of claims settled by the number of claims received in a financial year. So, the greater the ratio, the more are the chances of your claims getting settled quickly.
Insurers with a CSR of 90% and above are considered good to go with. You can check the ratio on the official website of both the Insurance Regulatory Development Authority of India (IRDAI) and life insurance companies. Take a look at the CSR of different insurers below.
|Life Insurance Companies||Claim Settlement Ratio for FY 2019-20|
|Max Life Insurance||99.22%|
|HDFC Life Insurance||99.07%|
|Canara HSBC OBC Life Insurance||98.12%|
|Aegon Life Insurance||98.01%|
|ICICI Prudential Life Insurance||97.80%|
|PNB MetLife Insurance||96.21%|
|Future Generali India Life Insurance||95.28%|
|Bajaj Allianz Life insurance||93.55%|
|Life Insurance Corporation of India (LIC)||93.45%|
Note – The claim settlement ratio is sourced through the websites of insurers and IRDAI.
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