Insurance products currently available in the market can be broadly classified into two types- a pure vanilla term insurance plan and others. All ‘other’ insurance products will either be market linked or provide guaranteed returns which are generally at par with the level of fixed deposit rates of return.
There is one simple rule to be followed while buying an insurance product- keep it separate and do not mix investment or retirement planning with it. This will enable you to get the maximum benefits of insurance in the form of a product, a product that has higher life cover amount and ultimately lower premiums. Buying the right term insurance may not be an easy process and your decision should be based on a combination of several factors.
Cover Amount: The maximum life cover that can be availed is 20-25 times of your annual gross salary income. However, to determine the right cover amount, a good starting point is to estimate the amount of annual expenditure required by your family based on your standard of living and lifestyle.
Policy Term: The ultimate objective of buying an insurance policy is to ensure that your dependents are covered financially after your death. So, for example, if you are a family of two and your spouse is financially independent, buying insurance does not make sense. However, if you have more than two members in your family, your children will be financially dependent on you till they attain the age of at least 25 years. And, this should be the ideal term of your insurance product.
Amount Settlement Ratio: Many insurance companies emphasize on their claim settlement ratio but an equally important metric should be the amount settlement ratio. For example, if an insurer settles 99 out of 100 claims it receives, its claim settlement ratio is 99%. In case a company settles total 95 crores 100 crores claims it receives, so it has a settlement ratio of 95%. Therefore, there is a high probability that the company settles 99% of the claims it receives, but may reject a claim that requires a higher amount to be settled, thereby lowering its amount settlement ratio. goes. Hence, it becomes important to check both the metrics together before finalizing any specific insurance company. The amount settlement ratio can be directly checked from the annual reports of the Insurance Regulatory and Development Authority of India.
Riders: There are usually four riders attached to a policy: waiver of premium, accidental death benefit, critical illness rider and terminal illness rider. Waiver of premium is one of the most important riders – it waives the premium if you are suffering from any pre-defined illness and the addition comes at a minimum cost. All other riders can be chosen as per your specific requirements, but can be ignored if you have a comprehensive health insurance plan and have adequate emergency fund.
Prepayment: Once you have decided with all the above factors, the final decision should be regarding the payment method- whether you want to pay premiums for the next five years, for 10 years, till retirement or for the term of the policy As far as. It is generally recommended not to go beyond retirement because after that the continuous cash flow in the form of salary stops. Early prepayment options (five years, 10 years, etc.) may sound more attractive as the amount paid in full will be less than the amount paid over the policy term or till retirement (at age 60) but it is important Also consider the time value of money before drawing any conclusions. It is advisable to calculate the present value of the future payments that you will make under various scenarios and then take a decision that would be more economically viable.
Some other important criteria should include how easy is the claim settlement process as you do not want your family members to be burdened by the operational inefficiencies of a company. This means that you have to make sure that you are dealing with a large company, in terms of the number of claims, and whether it has good paid-up capital that will ensure its smooth functioning in the long run.
Lastly, in this age of systematic investment plans and equity investments, buying the right term insurance product before you actually start making other investments is all the more important as it is the risk mitigation of your life that brings a sense of peace and freedom. will provide. ,
Surya Jain is an Associate, Business Valuation Team at Deloitte USI
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