How Much Life Insurance Do You Really Need? Calculating Your Coverage

Investing in a Life Insurance policy requires mindful research, premium calculation, and checking your current and old financial history. It is not some routine decision that can be formed with negligence and unpaid attention.

To find the best life insurance plan that fits your needs and your family’s requirements, you must consider aspects such as the number of dependents, existing liabilities, the claim settlement ratio of the insurer, and  many more. To make an informed decision that eliminates the risk of losses, this article discussed the crucial factors to check before opting for a life insurance plan.

7 Key Factors To Consider When Choosing a Life Insurance Plan

Life insurance is an effective long-term investment that protects your loved ones from financial challenges. However, choosing the right plan can sometimes be tricky. Let’s look at some critical factors to consider when selecting one.

• Consider Your Life Stage and Dependents

When deciding on a life Insurance plan, evaluating your needs and future financial goals, financial conditions, and dependent family members is crucial. The number of dependents in the family impacts the coverage amount you may require. If you are the only provider for your family, it may take them a long time to achieve their objectives in your absence. However, you may not have dependents to consider if you're unmarried. Consequently, you must analyse the coverage scope, amount, and period suitable for your loved ones' good future.

• Age and Your Financial Condition

Your age and financial condition are critical in selecting the type of policy. Life insurance comes in different forms—term, whole life, endowment plans, ULIPs, and more. You also have the option to add riders, such as critical illness, accidental death, and disability income. Choosing the right type of plan and attaching riders based on your needs is of utmost importance for maximum benefits.

For example, if you need life coverage for a short period to cover your existing loans, a term plan could be an option. On the other hand, if you require lifelong coverage with a cash value component, a whole life insurance plan would suit your needs. Remember that each type of life policy comes with unique features and benefits.

• Calculate the Existing Liabilities

Liabilities and debts are two crucial considerations when selecting the best life insurance plan. It is absolutely common to have long-term debt repayment obligations. Examine your present financial obligations. Take note of your monthly home bills, outstanding loans, and the cost of your children's schooling and other major expenses. You will clearly know how much financial support your family could require during your absence.

• Claim Settlement Ratio

The claim settlement ratio is one of the legal aspects of an insurance policy that is often neglected when opting for the best life insurance plan. This ratio reflects the percentage of claims paid out of the total claims filed with the insurer company in a single accounting year.

The higher the ratio, the more reliable the company is recognized. This high ratio will indicate that your family will not face much trouble while claiming the settlement in unforeseen circumstances. To make an informed decision, statistics say that an insurer company with above 80% CSR is considered good, while those with above 90% are exceptional. However, a company with a lower claim settlement ratio should never be preferred for any reason.

• Solvency Ratio

Another crucial legal aspect to ensure is the insurer's solvency ratio. Due to some terms and conditions, not all companies can fulfil the claims they promise to provide. SR helps you determine whether they can accept your claim, even during rush hour.

For instance, during natural disasters, it’s common for the insurance company to receive hundreds of frequent claims that need to be settled quickly. This is where the company’s SR comes into play. The IRDAI (Insurance Regulatory and Development Authority of India) states that every Life Insurance company must maintain a solvency ratio of 1.5 at a minimum for the insurer's requirements and convenience.

Conclusion

In a highly competitive marketplace, it's crucial to satisfy your instinct by evaluating the insurance needs and analysing multiple insurance companies and their capabilities before driving to any conclusion. You can make an appropriate decision with all the right data in your hands. To ensure you have the greatest coverage at the lowest cost, adhere to the factors mentioned in this article above and weigh the key facts and your insurance demands.

Moneycontrol Journalists are not involved in creation of this article.