Tips to choosing life insurance policy best suited for you

Deepak YohannanMyInsuranceClub.comIn today’s world of uncertainties, a life insurance policy is an absolute necessity. It provides the much needed financial security in times of any unforeseen event such as death of the bread winner. It supports the family in the need of the hour. Today, life insurance policies have evolved into a variety of forms. From pure term plans, to investment linked protection plans, the options available are plenty. Know your optionsAll life insurance policies work with a similar aim- of providing your family/dependents a pre-determined sum of money in the event of your unexpected death. Apart from this basic and vital nature, some policies also provide certain extra benefits catering to the diverse needs of policy holders. We could broadly categorize the options available into the following kinds.

Making your choiceThe decision on the kind of life insurance policy should be based on one’s individual financial needs. Each of the broad categories fulfills a unique need- whether one is looking purely at protection, or seeks a more comprehensive retirement plan. The Choice depends on preferences, the life stage one is in, and the financial commitments. Before we make a choice:Determine how much life cover you require: We commonly use the Human Life Value (HLV) for this. Though it may sound technical, in simple words, it is your life’s worth, in rupee terms. 

 

What’s Your Life Stage: In different life stages, your requirements, and financial commitments may be different. Unmarried and single (24 to 35 years): A stage characterized by low family responsibilities and lesser savings. You may opt for a longer duration term plan of say 15 years. You should also simultaneously start investing early in life. The earlier you start the more are your gains from investment due to the power of compounding. An endowment plan for the long term may also be considered to incorporate savings and insurance together. But do remember, premiums in this case would be higher than term plans. Married with small kids (35 to 45 years): This is a stage with responsibilities and financial goals shaping up. You should opt for a comprehensive insurance cover at this point in life. Along with the base plan, riders may be additionally opted for to enhance protection. This is also the time when you should get your financial plan in place, for future goals and retirement. Depending on your risk appetite, you could either opt for an endowment plan or, if you have a reasonable to high risk appetite ULIPs may also be considered.You could opt for any annuity plan to provide for a regular source of income post retirement.

Middle age till retirement (45 to 60 years): Though this may be a stage where you are almost on the verge of meeting your financial goals, having a life insurance is still a necessity at this stage. For those with steady investments in alternate avenues, a simple term plan should suit. Opting for a fresh policy at this stage may get to be expensive. Thus, term plans may work out far effective on the pocket.Schemes to Pick- Know Your Risk For those opting for investment-insurance plans, such as endowment or ULIPS, choosing the right scheme depends on the risk appetite.Investment based insurance plans are subject to:• Market risk: The ups and downs in the capital market.• Lack of guaranteed returns- Because the performance of the fund determines the gains or losses, there is no guarantee of returns. This is the risk the investor would have to bear.• Liquidity Risk: A lock in period initially of 3 to 4 years. Liquidating in this period may entail you to a loss of investment. Besides, in case when fund performance is low, your gains may be restricted too.The different fund options cater to varying degrees of risk appetites. You could choose the one that suits your individual profile.

Are Investment based Insurance Plans for me? You should typically not look at investment plans if:   >> You are a short term investor: Not only are your gains restricted, it works out expensive on the pocket too. The commissions in the first year are around 18%, 7%in the second year and 4% thereafter. Also the surrender values in the traditional plans can burn a big hole in your pocket.  >> When liquidity is a priority: There is a lock-in period of 3-5 years during which time units cannot be sold. So if you are looking out for a more liquid option such plans are not meant for you.>> When you want a larger insurance cover at lesser cost. The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal.