How to Choose the Best Life Insurance policy : 9 Factors to consider

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Choosing the best life insurance policy can be very difficult for some people, as it implies that one has to spend the extra money and the process of buying insurance brings about the thought of what will happen to our family upon our death. Then again, life insurance is not only restricted to the money received upon the policyholder’s death but also offers some fantastic plans that can help a person to anticipate future cash flow for certain important events in their life. In this article, we cover almost all the points on how to choose the best life insurance policy without causing much harm to your wallet. Read on!

What Is Life Insurance?

Before getting deep into the discussion, let us clear out the basics. Life insurance is a contract or an agreement between an insurance company, “the insurer”, and the one buying the insurance, “the insured”, in which the insured agrees to pay a premium in return for the insurance company’s commitment to paying a set amount (sum assured) to the nominee in case of the policyholder’s (insured’s) death. That’s it!

Do I Need Life Insurance?

The very fact that I need to explain this title attributes to the lack of awareness or understanding of life insurance in the vast population. But recent times have proved that unprecedented situations such as a pandemic can occur out of the blue, and having life insurance in such times can be extremely helpful and, in some cases, can relieve people of emotional trauma and financial predicaments. Other reasons to get life insurance include:

• ·         Paying any kind of debt, that otherwise would be a burden on your family.
• ·         Leaving an inheritance for your loved ones, or donating funds to a charitable cause.
• ·         Building wealth, by utilizing life insurance with certain investment options.
• ·         Availing various tax benefits and loans on the insurance policy.

Also read; How to choose the best Health insurance policy?

Steps for Choosing Life Insurance

Step 1: Evaluate your needs carefully

Once you have decided to get life insurance, the next crucial step is to evaluate your needs carefully. By evaluating needs we mean, deciding upon the right amount of cover (sum assured). And how do we know what’s the right cover? Well, it again depends on various factors such as a number of people depending upon you, whether only you are the sole earner in the family, or if any young children are there whose education needs to be taken care of or if there is an impending marriage in the family. The next important thing is evaluating your current lifestyle and how you plan your lifestyle to be in the future, based on your income, investment, assets, and liabilities. All these points differ from person to person, so it becomes very crucial to go through this step with utmost importance.

Step 2: Choosing the type of life insurance

If you are a working professional, employers usually offer group life insurance coverage or sometimes individual or optional coverage whose premiums are deducted from your salary. These coverages sometimes may be sufficient and sometimes not, in which case you can opt for an extra insurance policy. It is important to note that employer-sponsored life insurance is always term life insurance. There is another kind known as whole life insurance. Once again, choose between term life insurance or whole life insurance based on your needs. To know more about term life insurance and whole life insurance read our article on Understand the 5 types of life insurance policy before buying.

Step 3: Deciding the company (insurer) from which to buy life insurance

The main motive behind buying life insurance is that your family does not suffer any financial strain after you are gone. However, most people are lured into lower premiums without the thought of what would happen if the insurer makes it difficult to claim the cover. There is a way out of this predicament, and that is “Claim Settlement Ratio”. CSR is expressed in percentage and can be defined as the ratio of a number of claims settled to the number of claims received by an insurance company. The higher the ratio, the more trustworthy the insurance company is. So, don’t fall prey to the lower premiums offered by pretentious companies or insurance agents, always check the claim settlement ratio of the insurance company before deciding on one to choose the best life insurance policy for yourself.  

Step 4: Compare and plan

You now have figured out your coverage, type of insurance you want to buy, and as per step 3 you have listed some good insurance companies with good settlement ratios. The next thing you should do is compare the premiums of the same kind of policy (or products) for the listed companies. You can do so by utilizing various online policy comparing tools, this step can save you some money over premiums.

Plan for your better half. Both the spouses whether working or not should have the life insurance as one may be the earner while the other is always taking care of the family, and god-forbid if any harm were to befall to either of the spouses, the family is financially secured.

We should save a portion of our earnings and invest that where it can compound and give us the good returns which would help in growing wealth in the future. This is what I learned from the book "Rich Dad Poor Dad" written by Robert Kiyosaki. If you still didn't read this book I would like to suggest you as it can give you very valuable lessons on money.

   

Step 5: Name your beneficiaries

Usually, people choose their spouse as the beneficiary, but it is always advisable to consult a financial advisor to dodge the tax consequences. Naming a minor as a beneficiary will require a testamentary trust and in case you want to name your estate or trust as the benefactor will draw unintended tax consequences.

Step 6: Do not go overboard

Even though there is an investment component such as cash value and tax benefits under section 80C incorporated within life insurance policies, one must not stray away from the main purpose of buying an insurance policy. If saving taxes and investment is an important part of your plan then there are several other investment products to consider.

Read here; Why the stock market is the best investment ever?

Step 7: Submit your application

Once everything is done, you will be required to do some documentation (read the terms & conditions very carefully). The insurance company will then schedule a medical checkup to ensure you don’t suffer from any terminal illness and some other basic checkups. A simple suggestion from our side is to be prepared for the medical test, do some regular exercises, and lead a healthy lifestyle for your own benefit. If you fail any of the prescribed tests, your application will be rejected.

Step 8: Start paying your premiums

If the insurance company greenlights your application, then you are good to go! Start paying your premiums regularly to keep your policy active. You have now successfully shielded your family from unprecedented financial predicaments.

Step 9: Revisit your insurance needs

Another crucial step and the last one is to revisit your insurance needs. For example, you might have bought a policy when you were single and are now married, then you have to reconfigure your policy to suit your current situation accordingly. Another instance may occur wherein you may have to upgrade your term insurance plan to a whole life insurance plan. You may again feel the need to add additional riders to your policy for added benefits. Read about the different types of riders in our article What are Riders in Life Insurance and how they are useful for us?

In conclusion, these are the nine steps that will guide you through your process of buying life insurance. So, let's end this article "How to choose the best life insurance policy" with these nine steps.

Note: All the information provided in this article is for educational purposes only. Consulting an insurance advisor in case of confusion is always the best option. Hope you enjoyed reading this article, and if you have any queries please leave them in the comment section. We are more than happy to answer your queries. 😇