In today’s uncertain world, planning for your financial goals and securing your family’s future is essential. However, many people either remain underinsured or avoid buying life insurance altogether. The discomfort around discussing “death” and the misconception that insurance is a “sunk cost” often lead to delays in decision-making.
Additionally, with so many policies available, choosing the right one can be overwhelming. Often, insurance is sold rather than bought, especially during the tax-saving season from December to March when policies are purchased primarily for Section 80C benefits. But life insurance is much more than a tax-saving tool—it’s a crucial element of personal financial planning.
Key Factors to Consider When Choosing a Life Insurance Policy
1. Determine the Right Sum Assured
A pure term insurance policy (which provides only death benefits) is often the most cost-effective way to secure a high sum assured. The coverage amount should be calculated based on:
- Your current assets and liabilities
- Financial goals (e.g., children’s education, retirement)
- Existing insurance coverage, including employer-provided policies
A Certified Financial Planner (CFP) can help determine the right coverage amount based on your complete financial situation.
2. Choosing the Right Type of Insurance
More than just buying insurance, it’s important to select the right type of policy. The wide range of options—term plans, endowment plans, ULIPs, whole life policies—can be confusing. Before signing any contract, discuss with your financial advisor and ask critical questions. Remember, insurance is a long-term contract, and making changes later may be difficult.
3. Life Stage Considerations
Your life stage plays a crucial role in deciding whether you need life insurance and what type of policy is suitable:
- Young and single? You may not need life insurance unless your parents or other family members depend on your income.
- Married or have children? A term plan is essential to protect your family’s financial future.
- Close to retirement? Your focus should shift towards wealth preservation and estate planning rather than life insurance.
4. Affordable Premium Payments
Since insurance is a long-term commitment, it’s important to ensure that the premium is affordable over the entire policy tenure. Premium costs depend on:
- Coverage amount
- Policy duration
- Additional riders (e.g., critical illness, accidental death benefit)
- Your age and health status
Most insurers offer monthly, quarterly, half-yearly, or annual premium payment options. Choose a plan that aligns with your financial capacity to avoid policy lapse.
5. Understanding Riders (Add-Ons)
Riders provide additional benefits at an extra cost. Common add-ons include:
- Accidental Death Benefit – Additional payout if death occurs due to an accident.
- Critical Illness Cover – Lump sum payment on diagnosis of major illnesses like cancer, heart attack, or stroke.
- Waiver of Premium – Future premiums are waived if the insured is disabled due to an accident or illness.
Not all riders may be necessary, so consult your financial advisor before adding them to your policy.
6. The Importance of MWPA (Married Women’s Property Act)
Many people are unaware of the Married Women’s Property Act (MWPA). A life insurance policy bought under MWPA ensures that the benefits go directly to the wife and children and cannot be claimed by creditors or relatives. If you are married, this provision can provide added security for your family.
7. Market-Linked Policies (ULIPs)
If you opt for a Unit Linked Insurance Plan (ULIP), choose wisely:
- Some ULIPs focus on fixed-income returns, while others have equity-linked growth potential.
- Policies often allow free switches between investment options, giving flexibility in asset allocation.
- Understand the charges associated with ULIPs, such as fund management fees, premium allocation charges, and surrender costs.
8. Disclosing Your Health Status Honestly
Insurance is based on the principle of Utmost Good Faith, meaning you must truthfully disclose your medical history. Concealing pre-existing illnesses or ongoing treatments can lead to claim rejection. A higher premium due to medical conditions is better than a denied claim when your family needs financial support the most.
9. Naming and Updating Your Beneficiary
Choosing the right beneficiary is crucial. You can update or change your nominee at any time. However, keep in mind that a nominee is only a “caretaker” of the proceeds. The final distribution of assets will follow the Will or legal succession laws.
10. Online vs. Offline Policy Purchase
You can buy insurance online or offline:
- Online Policies: Often cheaper but require self-research and handling of claims independently.
- Through an Advisor: A financial advisor or insurance agent can guide you through policy selection and assist your family in case of a claim.
11. Special Insurance Policies for NRIs
Non-Resident Indians (NRIs) can now buy term insurance without traveling to India. Some insurers offer coverage up to ₹2 crores without requiring a physical medical test for applicants under 45 years old. If you are an NRI, explore these options for securing your family’s financial future.
Final Thoughts
Life insurance is not just a tax-saving tool—it is a financial safety net for your loved ones. A well-planned insurance strategy ensures that your family remains financially secure even in your absence.
Before buying a policy, evaluate your needs, compare options, and seek guidance from a Certified Financial Planner (CFP) or a trusted financial advisor.
In my next blog, I will discuss the importance of health insurance and how to choose the right medical coverage. Stay tuned!
For more personal finance insights, visit www.finclu.app. Have questions? Comment below or email me at munish.chauhan@finclu.app.
