Life insurance 101: All the basics you should know about

Updated: 27 Nov 2022, 01:54 PM IST

Life insurance should be our first priority as soon as we enter adulthood. Starting early is always better as there would be fewer premiums for a longer duration.

The life insurance claim intimation should be quick and consist of basic information such as policy number, name of the insured, date of death, name of the claimant etc.

Insurance as a concept and instrument deals with contingencies, right from health issues to property damage. As humans, the biggest contingency associated with us is our very own lives. The risks and uncertainties of death, disability, accident, etc., are quite high and can prove to be financially burdensome for the entire family.

Insurance is a financial safety net, helping you and your loved ones recover after something bad happens — such as disease, an accident, death, fire or theft. Having life insurance will give you peace of mind. Life is uncertain, and life insurance can offer financial assistance to your family when you are no longer in position to support them

Hence, life insurance should be our first priority as soon as we enter adulthood. Starting early is always better as there would be fewer premiums for a longer duration.

Why should you buy life insurance?

  • To anchor your family in the event of untimely death.
  • To cater to the education and needs of your children in the future in your absence.
  • To compensate for any income lost due to permanent disability.
  • To assist your family financially in case of terminal illness.

How much insurance should you buy?

The life insurance you opt for depends on certain factors, such as:

  • Number of dependents
  • Desired lifestyle for the family
  • Estimated educational needs of the children
  • Level of affordability
  • Any personal or business liabilities

As a thumb rule, you must opt for a cover size that is 10-15 times your annual income. Considering the inflation rates and keeping your goal-based financial planning in mind, it might be a better alternative to choose a life insurance cover that is 20 times your annual income. Your cover size should also be sufficient to settle any outstanding debts that you might have. All other requirements need to be met by investing the life insurance cover and using its income for that purpose.

Who to buy life insurance from?

While there are many factors like premiums, features and other comparisons that go into deciding who to buy your life insurance from, we’ll keep it pretty simple for your basic understanding.

We tend to lean towards private insurers; their settlement ratios are excellent, and premiums are reasonable with extensive features in their offerings. Prefer companies with 98% or higher claim settlement ratios.

Other tips on buying life insurance

  • You should choose an insurance plan that provides a life cover up to 85 years of age, as life expectancy is increasing and premiums for a longer cover are not significantly higher.
  • Invest in a term plan instead of a return-on-premium plan, as insurance is for protections and investments can be made in better products A return-on-premium plan refunds all premiums paid should the policyholder outlive the policy duration which is offered at a much higher premium and the ROI is 4-5% only.
  • Additionally, invest the difference in the premium of both the above plans into a financial instrument like a mutual fund to earn better wealth cover for your family.

Importance of insurance plan

Insurance has become an essential part of everyday life, playing a crucial role in both economic developments as well as having a role in supporting wider societal ends. The primary purpose of insurance is to provide protection against future risk, accidents and uncertainty. Insurance cannot check the happening of the risk, but can certainly provide for the losses of risk.

Most important type of insurance plans

There are many types of insurance available, but there are some which top the charts in terms of importance.  Life insurance, disability insurance, health insurance, home or property insurance, and automobile insurance are five types that everyone should have!

Health insurance is arguably the most important type of insurance. A Kaiser Family Foundation survey found that one in five people with medical bills filed for bankruptcy. With a stat like this, investing in health insurance can help you prevent a significant financial hardship.

Among the various plans term insurance is the purest and most affordable among the types of insurance policy in which, you can opt for a high life cover for a specific period.

Vivek Goel, Co-founder and Joint Managing Director, Tailwind Financial Services, a new edge wealth management platform.

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First Published: 27 Nov 2022, 01:54 PM IST