Life Insurance is a legal agreement between a policyholder and the insurance company, under which the insurer provides financial protection in certain unfortunate events, subject to applicable terms and conditions. The amount received by the nominees can be used to manage expenses, repay loans or fulfil future financial obligations. The premium paid towards the plan is eligible for tax benefits under applicable provisions of the Income Tax Act, 1961.
How to Choose the Right Life Insurance Plan?
The following steps can help you choose an insurance policy depending on the financial objectives and requirements:
Step 1: Assess the Life Insurance Objectives
As there are many different life insurance plans designed to meet different financial objectives, it becomes important to assess your requirements. Hence, analyse your financial objectives, i.e. requirements from the plan, which will help protect your loved ones and further achieve financial goals.
Step 2: Compare Plans
Once you have assessed your objectives, compare the different plans available based on the cost, tenure, features, etc. This comparison will help you choose a plan that offers the best combination of advantages as per your requirements.
Step 3: Check the Claim Settlement Ratio of the Insurer
A Claim Settlement Ratio depicts the percentage of claims settled by an insurance company against the total number of claims received during a financial year. A consistently high claim settlement ratio may indicate a good track record of an insurance company in settling claims. Besides this, also consider the claim process, terms and conditions, exclusions, financial strength, and other relevant factors.
Step 4: Calculate the Optimal Insurance Cover
Calculate the appropriate amount of insurance coverage that would be enough to meet the financial requirements of the family. While choosing the right coverage amount, consider factors such as outstanding loans or debts, financial objectives or obligations, lifestyle patterns, etc.
Step 5: Choose the Appropriate Policy Tenure
Next, select the appropriate life insurance policy tenure to protect the family against difficult situations. To choose the desired policy tenure, consider the age of self and dependent family members.
Step 6: Evaluate Tax Implications
Lastly, evaluate the tax implications that the chosen life insurance plan will provide, ensuring optimal financial planning.
Benefits of Life Insurance
Provided below are the benefits of an Insurance Policy
- Financial Security
Whenever a life insurance policy is bought, the insurance company will charge a premium to provide financial security to the policyholder’s beneficiaries in the unfortunate event of demise. The family members can use the life insurance proceeds to secure their future & meet routine expenses.
- Wealth Creation
Certain life insurance plans offer combined benefits of insurance and investment, which may help policyholders build wealth for the long term, subject to applicable terms and conditions.
- Tax Benefits
Eligible life insurance premiums may qualify for tax deductions u/s 80C, subject to the applicable overall deduction limit and conditions under the Income Tax Act, 1961. Certain receipts may also qualify for an exemption u/s 10(10D), subject to applicable conditions.
- Helps to achieve financial goals
Certain policies like ULIPs include an investment component which may help policyholders build funds over time. The value of investments may fluctuate since ULIP returns are linked to the performance of certain funds chosen.
Different Types of Life Insurance Plans
Provided below are the different types of insurance policies:
- Term Life Insurance
In this plan, beneficiaries of the term life insurance policy get death benefits in case the insured passes away during the tenure of the policy. It generally offers a high sum assured at an affordable premium rate in comparison to other plans. Normally, there are no maturity benefits payable in case the policyholder survives the plan, subject to applicable terms and conditions.
- Whole Life Insurance
This type of plan provides coverage to the policyholder for his entire lifetime, subject to applicable terms and conditions. It may also include savings or bonus-related benefits depending on the plan.
- Unit Linked Insurance Plan (ULIP)
A Part of the premium paid is allocated towards insurance coverage, and the remaining is invested in market-linked funds, such as debt, equity, or other securities, depending on the plan.
- Endowment Plan
This policy covers both insurance and savings factors, aiming to provide maturity benefits to the insured. It provides benefits in the form of a lump sum payment at the end of the policy tenure, even if no claim is made.
Conclusion
Choosing an appropriate life insurance plan can provide financial protection while supporting the long-term financial objectives. Also, consider certain factors such as policy features, coverage, tenure, premium, and the insurer’s Claim Settlement Ratio before making an informed decision based on your requirements.
FAQs
1. What are the factors affecting life insurance premium?
The following are the factors that affect life insurance premiums:
- Age:
It is considered one of the prime factors affecting the premium amount. The premium is comparatively lower for the younger generation & keeps increasing with a gradual increase in age.
- Gender:
Gender may also be considered by insurers while determining premiums, depending on the product and applicable underwriting methods.
- Health Conditions:
Pre-existing illness may affect the coverage, premium, or underwriting decision, depending on the insurance company.
- Family Health History:
Family medical history may also be considered while underwriting and can influence the coverage offered or premium, depending on the insurance company.
- Builds Savings Habit
Certain life insurance products require regular premium payments, which can encourage disciplined long-term financial planning and saving. However, the savings component and benefits vary depending on the type of policy.
- Smoking & Alcohol Habits:
Habits like drinking alcohol & smoking, which are lifestyle-related, lead to multiple health issues. This may affect the premium amount, as these lifestyle habits influence health and mortality risk.
- Type of Coverage:
The type and level of insurance coverage influence the premium amount; hence, it should be chosen depending on the policyholder’s financial objectives and requirements.
- Amount of Coverage:
The higher the amount covered, the higher the premium amount & vice versa.
- Occupation:
If your job is at a higher risk, the life insurance premium amount would also be higher & vice versa.
