How To Choose The Correct Life Insurance Policy
Choosing the correct life insurance policy does need due diligence. What may seem like a mammoth task, can be simplified by asking yourself- What are the goals that you want to achieve in life?
What are your priorities- securing the future of the dependant family in worst case scenario of your passing away, child education insurance, marriage, buying a house, car, holiday abroad every year, supporting parents, retirement planning.
Next step is to understand various policies available. Broadly, the various policies can be categorised as:
"Term insurance is purely a life insurance cover to provide for the dependant family members in case of untimely death or critical illness of the earner. It pays out only on the death or illness of the policy owner. If the insured survives the policy term, the insurance elapses and you get nothing. The premium in this type of policy is the lowest than of other insurance policies.
"Endowment plans are those that combine investments and insurance cover. Depending on the terms of the policy payments are made both if death occurs or on maturity of the plan. Premiums paid are invested by insurance companies generally in safe bonds. As you are guaranteed bonuses, the premium in such policies is higher than in term insurance.
"Unit Linked Insurance Plan [ULIP] is a dynamic life insurance product offering both risk cover and investment options. It differs from endowment plans because here you choose how to invest your money. One portion of the money is set aside for mortality risk cover and the remainder is invested in debt- equity markets according to your preference. ULIPs command a high premium but also provide good returns with wise investing.
"Pension Plans and Annuities to secure post retirement life. They do not provide life insurance cover but guarantee a source of income either for life or for a stipulated period after you stop working.
A few pointers for selecting the correct policy:
"A thumb rule in deciding the amount of cover one needs is that ideally it should be 8-10 times your annual income.
" Consider if the policy will mature in time when you foresee a requirement like your child"s higher education or marriage.
"Take into consideration your other cash venues, if you already have an adequate pension fund then perhaps a term insurance will suffice.
"Opt for policies that offer flexibility, for e.g. in case of non fixed income the time of payment of premium can be varied.
"Check out the riders available, they can enhance the value and cover of a policy for e.g. accidental death rider, waiver of premium rider.
"Choosing a good insurance company by studying its records of bonus payments etc.
"Do not treat life insurance as a tax saving instrument only, it will lead to being either under or over-insured or you may even be saddled with a wrong policy.
Most life insurance policies are designed to accommodate unique demands of an individual so after identifying your own requirements, the right policy can be easily chosen.