How To Select Life Insurance?

Hey guys, in today’s Article, I want to share with you about what is life insurance and how does it works.

There are many unexpected things that occur in our lives. We might pass away because of an accident or we might pass away because of an illness. There is one thing that we are 100% sure of that is we will pass away some day in our lives. Insurance is a product designed to provide you with financial security, should a disaster happen. And life insurance is specifically designed to protect your beneficiaries financially. Should you pass away one day? So what exactly is life insurance and how does it work?

What is Life Insurance?

Life insurance is a contract between an insurer and a policyholder, in which the insurer guarantees payment of a death benefit to the named beneficiaries upon the death of the insured. To put it simply, you pay a sum of money called the premium to the insurer, and when you pass away your beneficiaries, usually your family members get a lump sum of money called the death benefit. Now, the next question is, should you buy a life insurance?

Why you need life insurance?

You should buy a policy if you have anyone who may depend on you for financial support, for example, your kids or elderly parents. However, if there is no one that requires you to support financially, then you don’t need one.

There are a couple of important points to note here. First, the benefits under term insurance are payable only upon the death of the policyholder, which means if the policyholder survives, then no maturity or survival benefits are payable. And second, the debt of the policyholder often covers more situations, including sickness and accidents. But like all the insurance contracts, there are some minor exclusions, like drunk driving, adventure sports, etc that one must understand when buying a term plan. Now, over the years, the term insurance products have seen much evolution and now offer a range of options to consumers in terms of some assured age, coverage, types of payouts, payment schedule, addons, etc.

If you haven’t bought a term insurance plan or if the life insurance coverage you have is less than 15 times of your annual income, that’s probably a good idea for you to not wait any further and opt for a good term insurance policy.

How much of Insurance you must have?

There are 2 approaches for deciding your insurance risk cover;

1. Thumb Rule: 10 -15 times of your annual income. In this approach, it may or may not be an adequate amount to provide your loved one with adequate financial security.

2. Human Life Value Approach: A Human Life Value calculator can help you arrive at your Human Live Value. Simply put, the life insurance amount that you will need. Several factors need to be considered for calculating human life value like;

·?Your current age and the age you wish to retire

·?Your lifestage

·?Your regular expenses (housing, travel, medical, food, education, lifestyle, etc.)

·?Your pending loans or EMIs

·??Future financial goals (child’s higher education, buying a house, etc.)

·??Your savings and investments

·??If you have any existing life insurance,

The human life value will keep changing depending on your life stage, inflation, etc. These changes usually occur at different stages of life. When you’re 25 and single, your human life value will differ from your human life value when you turn 35 and when you are a parent of a child. It is, therefore, prudent to consider calculating your Human Life Value regularly.

I recommend using Human Life value approach for buying insurance cover.

What are Insurance Policies Available in the market and how to Select one for myself?

Let’s discuss life insurance, nature, and scope:

A whole life policy is a permanent life insurance policy, which means this policy extends life insurance coverage until the demise of the policyholder, post which the nominee is paid, the benefits that are listed under this policy. Now, the phrase whole life policy is not a standardized one, and we have seen different applications of that with different insurance companies.

For example, some insurers use it as an extension of a term insurance plan that simply goes on till the age of 99 or 100 years and they pay nothing else out other than the death benefit. Then there are some other insurers who define a whole life policy as one which not only has death benefits but also comes with maturity benefits, survival benefits, and even a bonus.

An endowment policy is one which, apart from covering the life of the insured, also helps the policyholder save regularly over a period. This money that is saved is then given to the policyholder as a lump sum amount once the policy matures. This type of policy is pitched as a savings plan and is almost always linked to some future event, which is a good ten to 15 years ago. For example, a popular pitch made by LIC agents to parents is to contribute towards an endowment plan for their children’s education or marriage.

From a benefits perspective, an endowment policy comes with a life cover which is paid to the nominee upon the death of the policyholder.

However, if the policyholder does not die and survive the policy term when he or she is paid, the guaranteed maturity proceeds and some bonus. From a purpose point of view, the endowment plans are not a wealth creation or investing tool, and insurance companies never pitched that way. These plans are clearly savings instruments which offer lower than average returns, but then they also offer guaranteed, tax friendly returns, which makes these endowment policies and instrument of choice for extremely risk-averse individuals.

Money back policies are another popular life insurance category. It’s popular with the insurance agents as they make a good commission of money back plan. But a second factor that lends to its popularity is the catch phrase money back, which at least makes people understand what this policy is all about.

Let’s understand how money back policies are constructed by examining the Life Insurance Corporation of India or LIC’s New Money Back Plan. Now, LIC’s new money back plan comes in two variants, a policy term of 20 years and another one that goes up to 25 years.

For this illustration, let’s stick to the one which has a policy term of 20 years. So, as per the policy terms, a policyholder needs to pay a premium for 15 years. So not 20 years, but 15 years, and there are potentially four benefits within the plan. First, there is a death benefit that goes up to 125 percent of the basic sum assured and is paid if the policyholder expires any time within the 20 year policy term. Second, there is a survival benefit which gets activated at the end of the fifth, 10th, and 15th policy year, and the policyholder is paid 20% of the basic sum assured in each of these three periods.

The third benefit is the maturity benefit, which amounts to 40% of the basic sum assured and is paid out if the policyholder survives the entire 20 year policy term. And the fourth and final benefit are the bonuses, which are nothing but the policyholder receiving a share in the profits of the insurance company. This bonus part is entirely at the discretion of the insurance company and depends on the profitability of the insurance company. So Money back policy offers these four benefits besides the tax benefits that accompany all life insurance policies.

From a return perspective, because of its guaranteed nature, one can expect the returns to be on the lower side.

Unit Linked insurance plans or ULIPs are a product of perspectives. Insurance companies and agents exhibit an ULIPs tax saving and inbuilt insurance cover, often at the expense of playing down the impact of charges on the product returns. Financial planners and mutual fund distributors explain an outdated version of the chart structure, which is almost non-existent in the modern day ULIP. So there is some propaganda here at play, depending on who you are listening to. But simply, a ULIP or unit linked insurance policy is an investment product which has insurance built into it.

In fact, ULIPs are pushed as a triple benefit product that offers investment insurance and tax saving benefits. One important thing to note here is that, unlike an endowment or money back, policy units cannot guarantee returns. In fact, they cannot give you any indicative returns as well, because the performance of the funds is linked to how the equity markets or the bond markets perform, which is why they carry the term market linked in the name. Now, the problem or the noise around ULIPs has always been around the charges that are payable by the policyholder.

These charges come in many forms, like a premium allocation charge, a policy administration charge, switching charges, and a few more expenses.

These charges were quite blatant when these products were first introduced in India, but since 2011, the ULIP charges have been coming down, and the modern day ULIP differs from what it was a decade ago.?

A common trend across all five types of life insurance policies is the tax benefits that are provided under the Income Tax Act, subject to some conditions.

Premiums paid towards life insurance carry section 80-C benefits and section 10-10-D makes maturity benefits non taxable.

These tax incentives are a big part of the life insurance story. The other commonality, you might have noticed, is to do with the long-term nature of these products. Every life insurance policy has a term of at least five years going all the way to 100 years, as we saw with whole life policies. In terms of differences between these five life insurance products, there are many variables to look at, but let’s discuss a couple of these here for one. All five policy types serve a different purpose for the policyholders.

For instance, term insurance policies are for protection only.?If you die within the policy term, then your dependence will receive money, which should provide some help towards their financial future. Similarly, a whole life policy is clearly a way of leaving behind a legacy for your children. Endowment and Money Back policies are meant for savings, while ULIPs serve the purpose of wealth creation and investment plan.

The other difference area we would want to highlight here is on competing products. So with term insurance, there are no competing products, which means if you were to die today, there is no financial instrument that will pull out a crore of rupees and give it to your family.

However, the other life insurance products have strong competitors with the whole life policy, competing with investment products and real estate endowment and money back, competing with fixed deposits and ULIPs, often drawing sward with mutual funds.

It is always advisable to prioritise protection above investments or savings as for investments and savings; we have multiple products such as mutual funds, Post Office and other Instruments. Return from other savings products is better than insurance and the expense ratio of Mutual Funds is less than ULIP policies. You do not need life insurance after 60, i.e. after your retirement.

So one must buy term insurance to protect families’ financial future.

Which leads to next question: How should be select a term insurance policy?

When you want to select term insurance policy, you need to compare various term insurance policies based on life insurance key terms.

1.????Claim settlement ratio: A measure of the percentage of claims settled by an insurer in a given financial year as opposed to the number of claims received. This can be measured in terms of the number of claims settled as well as the value of claims settled. Claim settlement ratio is a key metric to gauge the ability and efficiency of an insurer to settle claims and is used as a primary decision-making guide to choose an insurer. Higher claims settlement ratio is better.

2.????Persistency ratio: A ratio that measures the proportion of customers who renewed their policies at the end of the year. The ratio can be calculated with the number of policies and value (premium collected) of such policies. This is a good proxy to measure an insurer’s service standards and selling practices as it shows how much confidence customers have with the insurer. Higher persistency ratio is better.

3.????Solvency ratio:?It is a measure of how much assets a company has as against its liabilities. It helps measure the financial soundness of an insurer and the firm’s ability to pay the claims due. IRDA specifies a minimum ratio of 1.5 times. A higher ratio is better, but new and small firms can sometimes show high solvency ratio because of the nascent stage of business.

4.????Availability of Office in your geography in the event of claim or service issue

5.????Finally Premium amount, if all above are equal, looks for low premium policy.?

Whether to buy online or offline:

Online Vs Offline Term Insurance Plans

The key difference between the online and offline term insurance plans is:

Why and When To review life insurance?

As discussed above, Human Life Value keeps on changing according to your life stage, hence it is suggested to review your insurance coverage.

·?While Getting Married: If you have bought your insurance before marriage, you need to review your risk cover to accommodate newly inducted member in your family.

·?On Birth of Children: You would also require reviewing your risk cover when you have a new child in your life as it will also affect your HLV.

·?While Taking a loan: Your loan being liability you need to pay even if you are not around. You need to review your life cover when you take any kind of loan.

How to protect your family’s financial future by buying your Insurance Under Married Women’s Property Act?

What Is the Married Women’s Property ACT?

The Married Women’s Property Act originally stated that the earnings of a married woman in India (barring citizens of Jammu and Kashmir) is to be considered as her separate property. An MWP act in life insurance amendment was added in 1923 which made it relevant to life insurance, according to which the proceeds from a husband’s insurance policy may not be subject to the control of the husband, to his creditors, or form a part of his estate.

What this basically means is that if a married man buys a policy with an MWP addendum, the proceeds from MWP act in life insurance will be an effective property of his beneficiaries and not be treated as if it were a part of his estate. Therefore, the proceeds from MWP act in life insurance cannot be used to repay his debt or other liabilities even after his death.

Who Can Get It?

Any married man can take a life insurance policy under MWP Act, including divorced persons and

Widowers. All varieties of policies are covered under MWP irrespective of time, age, and premium.

Amount. A married woman can also buy MWP policy in her name with her children as beneficiaries. The husband will get nothing from the policy, as it will be considered a separate asset.

A life insurance policy under MWP Act is a must for self-employed individuals, business owners, those who need to take substantial amounts of credit, and those who have volatile sources of income.

Who Are The Beneficiaries And Trustees?

The beneficiary under MWP act in life insurance could be:

1. The wife alone

2. The child/ children alone (both natural and adopted)

3. Wife and children together

The policyholder can appoint one or more people (majors) as trustees. Trustee(s) can also be an institution, like a bank, or a beneficiary as well. The consent of the trustee must be documented, along with the MWP addendum. Unlike a beneficiary, having a trustee is not mandatory and can be changed any time.

Hope above article would be helpful to decide about your Life Insurance Strategy, which is a pillar for a successful financial planning.

If you like this article, please share it. If you wish to know more about my work please click here .