Know how to buy the right term life insurance policy

When buying an insurance product, a simple rule should be followed: keep it separate and do not combine investment or retirement planning with it. This allows you to take maximum advantage of an insurance product, a product with a higher life cover amount and ultimately lower premiums. Buying the right term life insurance policy may not be a simple process and your decision should be based on a combination of several factors.

Coverage amount: The maximum life insurance policy that can be taken out is 20-25 times your gross annual income. To determine the right amount of coverage, however, a good starting point is to estimate your family’s annual expenses based on your standard of living and lifestyle.

Policy duration: The ultimate goal of taking out insurance is to ensure that your dependents are financially covered after your death. So, for example, if you are a family of two and your partner is financially independent, there is no point in getting insurance. However, if your family consists of more than two members, your children will be financially dependent on you until they reach the age of at least 25 years. And that should be the ideal term of your insurance product.

Settlement ratio amount: Many insurance companies harp on their claims settlement ratio, but an equally important metric should be the settlement ratio. For example, if an insurer settles 99 out of 100 claims received, the claims settlement ratio is 99%. In case a company settles €95 crore of the total €100 crore claims it receives, then the settlement rate is 95%. So there is a good chance that the company will settle 99% of the claims received, but will reject one claim that involves a higher amount to be settled, reducing the settlement rate. Therefore, it becomes important to check both metrics one after the other before finalizing a specific insurance company. The amount of the settlement ratio can be directly checked in the annual report of the Insurance Regulatory and Development Authority of India.

Riders: There are typically four drivers associated with a policy: premium waiver, accidental death benefit, critically ill rider, and terminally ill rider. The premium waiver is one of the main drivers: it waives the premium in case you are identified with a predefined illness and carries additional minimal costs. All other riders can be chosen according to your specific requirements, but can be ignored if you have comprehensive health insurance and maintain sufficient emergency funds.

Prepayment: Once you’ve made up your mind with all the above factors, the final decision should be about the method of payment – whether you want to pay the premium for the next five years, 10 years, until retirement or until the term of the policy. It is normally recommended not to go beyond retirement as the constant cash flow in terms of salary stops after that. The early prepayment option (five years, 10 years, etc.) may seem more attractive as the amount paid would be lower in absolute terms compared to the amount paid until the term of the policy or retirement (at age 60 ), but it is important to also consider the time value of money before jumping to conclusions. It is advised to calculate the present value of future payments you would make under different scenarios and then make a decision that is more financially viable.

Some of the other important criteria include how smoothly the claims handling process is going as you don’t want your family members burdened with operational inefficiencies of any company. This means that you need to make sure you are dealing with a large company, in terms of the number of claims it handles and whether it has well-paid capital that would guarantee its smooth operation in the long run.

Finally, in this era of systematic investment planning and stock investing, buying the right term life insurance product is more important than before actually making other investments, as it is the mitigation of your life’s risk that should bring a sense of peace and freedom. offer .

Surya Jain is an associate, business valuations team, at Deloitte USI