As a valuable risk mitigation tool that ensures adequate financial cover to dependent family members in case of an unforeseen event, one needs to exercise due diligence while purchasing one life insurance policy or the other. After all, selecting a wrong type of policy may – among other things, result in either being under or over insured in the prevalent market.
The parameters while considering life insurance policies are varied: one should look at the premium, the extent of cover, settlement ratio of the insurance company in question, its tenure, and any tax benefits there may be.
The various life insurance policies
In essence, the multitude of life insurance plans can be placed into two neat categories: those that provide investment benefits, and those that do not. A term plan occupies one end of these extremes – offering pure protection and no investment options, other policies such as endowment, money-back or unit linked insurance plans (ULIPs) offer life cover in conjunction with some investment benefits.
Term plans are available at a very low premium, and you can avail tax benefits under Section 80C against this premium. A ULIP channels the investible component of your money into equity and debt products to generate returns. An endowment policy offers low returns alongside low risk. And with a money-back policy, you get both life protection as well as investment benefits – with the return on investment commencing at the time of the policy period itself.
How to opt for life insurance
In most circumstances, you should look to separate your investment and insurance needs. If you are on the hunt for a low-risk investment option, the multitude of fixed income options available in the market can potentially offer you a much higher return than insurance products. An easily understandable term plan should suffice for most peoples’ insurance needs, offering adequate protection for a relatively low premium, and across a lengthy tenure.
Estimating the size of life cover
When you come to the point where you have to choose the amount of life cover, you should opt for an amount which allows your family to live a comfortable life in your absence. This cover should be adequate to meet their financial obligations, achieve their financial goals, and help repay debts until the dependent family members in question start earning on their own. A simple thumb rule you can consider is to aim for approximately 10 to 15 times your annual income as your cover.
Lastly, you must stray away from the habit of investing in or picking up insurance plans merely to save tax at the end of each financial year. Such a decision may lock in your funds for several years, even needing you to invest in the product repeatedly at times. This makes it difficult for you to exit this policy in a straightforward manner. If tax saving is your goal, other instruments can help you achieve it in a more efficient fashion.(Courtesy TNN)