Purchasing a financial product for risk management, savings, or investments can be a daunting task. However, analyzing your needs and researching the best options can provide peace of mind.
Life insurance buyers often face confusion about which policy to choose to secure their future and their families. Understanding how to buy the right life insurance policy is crucial.
Additionally, there are myths and market practices that can prevent buyers from selecting the best life insurance policy.
With hundreds of options available under the insurance umbrella, making a decision can be even more challenging.
Dilemma in buying a Best Life Insurance Policy for you
If you ask your friends and colleagues about their plans for family security, they might say they are saving money, have taken out some form of insurance, and are contributing to employer-driven saving plans such as 401(k), EPF, NPS, bank deposits, or group insurance.
This way they think they and their families are adequately insured, without going through the calculations or a process to ascertain the amount of risk cover or what type of insurance they need for the cause.
Most people will answer, “Yes, we have insurance,” often referring to savings plans with high annual premiums to cover their families.
However, if you ask them about the specific coverage they have in case of their death, many are uncertain. They often don’t know which is the best life insurance policy for their needs.
People tend to focus on immediate goals like buying a house or funding their children’s education. But what about risk coverage and long-term financial security for their families, retirement, and healthcare?
This falls under personal risk management, where one identifies potential risks throughout life and mitigates them through insurance and saving for emergencies.
In developing country like India, life insurance penetration is only 3.7% and the figure is well below for medical or health insurance subscribers, against the world average of 6.4%.
Seems a big market for the insurance companies and how under penetrated Indian population is for Life Insurance. Because people hardly put life insurance in their priority list to buy.
Your dilemma ends here !!
This article provides essential information to help you determine the best insurance policy for you, starting with the basics:
- What is life insurance?
- Why do we need it?
- How to choose the best life insurance policy for your needs?
Understanding what insurance is is the first step in selecting the right life insurance policy. Throughout our financial lives, we maintain a lifestyle based on our income levels and preferences.
To ensure that our families can maintain this lifestyle even after the loss of an income earner, we need a life insurance policy tailored to our needs.
Additionally, we often take on mortgage loans, car loans, personal loans, and more. To protect your dependents from these liabilities, it’s crucial to have the appropriate life cover in place.
Insurance is a risk cover, which compensates with an amount to the dependents, as decided by the policy holder at the time of buying the insurance and have been paying regular premiums.
So that, in the event of unfortunate occurrence, for which the insurance has been bought from an Insurance company, the sum assured as per the contract is provided to the nominee/s of the policy buyer.
Why Do We Need Life Insurance? Have You Identified Your Risks?
Life is full of uncertainties, or “risks,” such as dying early, living too long, maintaining a house, facing medical emergencies, dealing with car damage or theft, and many more.
To prepare for these risks, we buy best life Insurance policy like: life insurance, health insurance, vehicle insurance, fire insurance, and others.
This article focuses on how to buy the best life insurance policy, a cost-effective way to financially secure your family or dependents.
Simplifying the Objective of Buying Life Insurance:
- Financial Security for Dependents: In the event of the death of the household’s breadwinner, life insurance ensures that the dependents or the nominee receive a predetermined sum assured under the policy.
- A Contract of Assurance: It is a contract between the policyholder and the insurance company. The policyholder agrees to pay regular premiums, and in return, the company promises to pay a predetermined amount to the beneficiary in the event of the policyholder’s death.
By identifying and understanding these risks, you can make an informed decision to secure the best life insurance policy that meets your needs and ensures your family’s financial stability.
Problem of Choices in the Insurance Market and How to Buy the Best Life Insurance Plan
Navigating the insurance market can be overwhelming due to the variety of life insurance policies available. Some policies only provide risk coverage, while others combine risk coverage with savings or investment plans.
- Types of Life Insurance Policies:
- Pure Risk Coverage: These policies, such as term insurance, offer a payout only in the event of the policyholder’s death.
- Savings Plans: These policies provide a sum of money with interest at the end of the policy term and include a risk cover component.
- Investment-Linked Policies: Some policies invest in the stock market to maximize returns, popular during the 2003-2008 bull run.
- Popular Life Insurance Plans:
- Endowment Plans: These combine savings with risk coverage, paying out a lump sum with interest at the end of the term.
- Money Back Plans: These provide periodic returns during the policy term along with risk coverage.
- Children Plans: These focus on securing funds for a child’s future needs.
- Unit Linked Insurance Plans (ULIPs): These invest a portion of the premium in the stock market.
- Term Plans with Premium Return: These return the premiums paid if the policyholder survives the policy term.
- Pure Risk Term Insurance:
- These policies provide a payout only in case of the policyholder’s death, ensuring financial support for the nominee.
- Key Advice:
- Separate Insurance and Investments: It’s crucial to keep insurance and investments separate to avoid complications. Combining them might seem convenient but can lead to suboptimal financial planning.
By understanding the types of policies and their features, you can choose the best life insurance plan that aligns with your financial goals and risk management needs.
Here is Best Life Insurance Policy for You
Refining Life Insurance Choices: Opting for Term Insurance
When considering life insurance options to secure our loved ones financially, the simplest and often the most effective choice is a Term Insurance Plan.
Term Insurance Plan:
- Pure Risk Cover: Term insurance offers straightforward risk coverage without any investment or savings component.
- Financial Security: For many individuals, a term insurance plan provides the ideal solution to ensure the financial well-being of their families and dependents as best life Insurance policy.
By opting for a term insurance plan, you can provide your loved ones with essential financial protection without the complexity of investment-linked policies.
Why only a Term plan insurance?
Refining Insurance Choices: Prioritizing Needs Over Extras
When considering insurance options, it’s essential to prioritize needs over extras. For instance, do you want a savings plan bundled with your car insurance? The answer is likely no.
Adding unnecessary components to car insurance not only increases costs but also doesn’t align with the primary purpose of car insurance.
Similarly, when it comes to life insurance, opting for a savings component can escalate costs and may not be the most efficient approach.
A vanilla term insurance plan, devoid of any savings or investment elements, is often the most suitable choice. It focuses solely on providing financial security to your dependents in the event of your untimely demise.
By choosing a straightforward term insurance plan, you ensure that your loved ones are adequately protected without unnecessary financial burdens or complexities.
Benefits of a Term Insurance policy:
1. Most affordable premiums
Generally, pure term plans are inexpensive in comparison to the other insurance plans because those have saving component in it and no one is required to manage and grow your money.
So, fund manager or fixed income generation expenses are not incurred, unlike, an investment linked insurance plan.
2. Easy to Understand
As the only component attached to the term insurance contract is that, in case of death of the policy holder a particular amount will be paid to the nominees during a policy period mentioned in the agreement. This is the main feature of a best life insurance policy for you.
3. Easy to buy and compare
There are two ways to buy a term insurance, first, from an insurance agent or insurance company’s office directly.
Second, these days, almost all the insurance companies provide the option of buying term insurance plan though their websites.
Additionally, as the all the details filled by you and premium is paid online there are further discounts on premiums on all the online term insurance plans.
Also, you can compare the premiums and Claim settlement Ratios of different insurance companies online before buying the best life Insurance policy for yourself.
Lower the premium and higher the Claim settlement Ratios, may well be the combination to select while buying term insurance plan.
4. Early you buy, lower the premiums
Insurance plans are liked to your age. As the age increases, the premiums to be paid increases in proportion.
Thus, it is advisable to buy a term life insurance policy for you in your twenties of just after you get married to cover financial risks of our dependent spouse or parents.
5. Additional support in mortgage/loan
As you are already covered under a term plan adequately in accordance to the amount of loan mortgage taken from the lender, you may get lower interest rate and higher amount as a benefit.
Moreover, any additional life cover is not required to be taken by the bank or a lender, in case you’re a death, they get required assure amount from the insurance company.
6. Income Tax benefits
In some of the countries, if you buy a term insurance policy, you may get tax deductions under the law of the land, because you are covering your risk yourself.
The amount of premiums deducted from your taxable income, of a particular financial year to certain limit, which decreases your tax liabilities.
7. Flexibility during the period of life insurance policy cover
Term insurance policies has the flexibility to increase the sum assured, add an additional feature for instance, accidental cover, critical illness cover and more.
Moreover, as the age of a policy buyer increases, the responsibilities also increase, so, you can enhance the amount of risk cover in between depending on your household lifestyle.
Opting for Term Insurance: Prioritize Your Needs over Promotions
Term insurance plans often receive less promotion from insurance agencies due to lower revenue generation and subsequently reduced agency commissions.
Consequently, it falls upon us to select insurance options that best align with our requirements and circumstances for the best life Insurance policy.
It’s imperative to conduct thorough research before committing to any insurance policy, even if recommended by an agent.
Given the long-term nature of insurance commitments, our decisions should be guided by our specific needs, rather than being swayed by innovative product offerings from insurance companies.
Remember, simplicity often holds the key to the best insurance solutions.
“Life is not complex. We are complex. Life is simple, and the simple thing is the right thing.”
— Oscar Wilde
How much Term life Insurance we should buy?
Before buying best term insurance policy, we have to calculate the amount of SUM Assured or guaranteed sum of money, we require to cover the financial risk.
In such a manner that your dependents can on live adequate means for a approximately a decade.
Points to consider to calculate life insurance amount in which premiums will be calculated to buy a Life Insurance Policy :-
- Calculate total expenses of your household for a month and multiply it by 150. This will cover the inflation factor in the future expenses.
- According to life insurance companies, they limit the life insurance amount to 10 to 15 times of the annual salary or income of the policy buyer.
- Calculate your future household expenditure goals, for instance, child education, buying a house and more.
- Additionally, you need to calculate the liabilities, such as, mortgages, personal loans and credit card loans, among others.
- Moreover, if your spouse is also working then, they should buy their own term life insurance policy.
Insurance and Investment – How to tackle?
There could be situation, where insurance and saving plans are being offered as a bundled product by insurance companies.
The major short coming with the bundled products are that, neither we get the amount of protection we required, nor we are able to get best returns on our investments made.
As mentioned earlier in the article, we should not mix the risk protection or insurance with investing plan when buying best life Insurance policy.
To understand it further, I have made a table where major differences are mentioned to decide with clarity between two offering: –
| S.No. | Pure Insurance/Risk coverage | Investment plan |
| 1. | Main Objective here is to cover the risks of life and belongings. | Main objective here is to get returns on your capital invested. |
| 2. | No money is refunded at the end of a period, unless an insured event occurs. | All the sum of money invested with returns can be redeemed. |
| 3. | Administration charges are higher from 7% to as high as 35% per annum. | Fund manager and admin charges may vary from 0.10% to 2.50% p.a. |
| 4. | Get higher Sum Assured for insurance in a small premium. | Get higher returns on your investments based on prevailing market rates or returns. |
| 5. | A certain length of period is covered. | No particular period required, however, the more the better it is for compounding. |
| 6. | Need to pay higher amount with increase in age of a buyer. | No such criteria here, may invest more to get more returns after longer period of time. |
| 7. | Money paid here belongs to insurance company. | Money invested is all yours, also, returns earned on it comes into your pocket. |
| 8. | 100% Risk amount (SA) is assured right from the start of the insurance policy. | Need to invest longer and regularly to get a hefty corpus. |
Understanding the Difference: Term Insurance vs. Investment Plans
In the comparison provided above, it’s evident that insurance plans and investment plans serve distinct purposes.
Term Insurance Plan:
- Offers financial security against unexpected death or loss of income.
- Requires minimal premium payments for substantial coverage.
- Ideal for providing immediate risk coverage, even in your twenties or at the start of marriage.
- Leaves room for investing the saved money in various asset classes for higher returns.
Investment Plans:
- Involve regular investments in avenues like fixed deposits, mutual funds, stocks, real estate, and gold.
- Aim to maximize returns on the money not allocated to expensive insurance saving plans.
- Avoids the higher charges associated with combining insurance and saving plans.
- Allows for strategic allocation of funds to capitalize on more lucrative investment opportunities.
By opting for a term insurance plan with a modest premium, you can ensure financial protection for your loved ones while freeing up resources to pursue potentially higher-yield investments elsewhere.
This approach strikes a balance between risk coverage and wealth creation, setting you on a path towards long-term financial security.
Do consult with your financial advisor for best suited financial option for you.
This way you will get best of the risk coverage against early death and build bigger sum of amount on your invested money, as there will be higher chances of getting compounding, if you do not withdraw the amount till a period.
“Compounding is the 8th wonder of the world”
said by Elbert Einstein
To make most of compounding, we need invest regularly and for a longer period of time. For instance, if you invest 10,000 bucks each year for ten years and rate of return expected is 10%, then you build a corpus of 175,311.67 bucks.
But if you increase the period by 5 years, the amount goes up to 349,497, which almost double in just those additional 5 years of retaining the investments, instead of withdrawing in between.
Please do consult with your financial advisor for all financial related decisions.
Conclusion:
In conclusion, the primary objective of purchasing a life insurance policy is to shield loved ones from the financial risks associated with the unexpected loss of the family’s primary breadwinner or income provider.
It’s imperative for individuals to secure adequate life insurance coverage to safeguard their families and dependents, ensuring the continuity of their current lifestyle over an extended period.
Furthermore, it’s advisable to refrain from adopting a bundled approach that combines risk protection with savings. Opting for standalone term insurance plans allows for more flexibility and cost-effectiveness.
This approach ensures that the focus remains on building a substantial financial corpus through strategic investment opportunities rather than being tied to a single bundled savings plan.
Insurance saving plans often yield fixed returns that may fall short of desired levels due to the deduction of higher charges from the paid premiums. By prioritizing best insurance plan for life through flexibility and maximizing investment returns, individuals can pave the way for long-term financial security and prosperity.
So, tell me, Do you have a Term Insurance Plan or Sum assured which is at least 10-12 times of your yearly income ?
Please do consult with your financial advisor for all financial related decisions.