How to choose best Life Insurance Policy/Plan? | Term Plan vs Traditional Plan

Life Insurance is important for all, no matter whether you are married or not. Most people buy Life insurance policy to save tax or investment purposes, if you have bought the policy for the same reason, then I am sorry to say, but your policy is worthless to you. Today we will be discussing why should we have Life Insurance policy and what are the things we should keep in our mind before buying any Life insurance policy?

 

Things to consider before buying life insurance

 

Objective: Our first objective is life risk cover. In the event of your death, your family has to pay financial liabilities you have, such as your debts. Not only debts, since you are the earning person in your family then they will be required to fulfill other financial liabilities too i.e. children's education, marriage, etc. Therefore if you have insurance coverage, your liabilities will not be a burden for your family members.

 

Early Age: Individuals must buy life insurance as early as. If you insured your life early, your premium will be lower. Your insurer charges you less as you are young and healthy. As you become older premium will be high considering you are becoming unfit year by year.

 

Sum assured amount: Life insurance objective is to safeguard your family from your financial liabilities in the event of your death. So while buying Life insurance we should choose sum assured according to our liabilities. In financial planning it is considered to have a sum assured of 20 times your annual income, say if you have 3 lakh annual income then sum assured must be 60 lakh rupees. 

 

Claim settlement ratio: Before choosing any company you can check their claim settlement ratio. This ratio tells the percentage of claims the insurer has paid out during a financial year. 

 

Do not expect returns: In India, people see insurance policies like investment instruments. They buy life insurance, not for risk cover but investment planning, and therefore they buy traditional life insurance policy whose premium is high but risk cover or sum assured is insufficient.

 

Avoid agents: Agents help us out in getting information about plans and to process applications. For this service insurance companies pay commission to them and therefore buying insurance through agents becomes costly. Earlier online facility was not available but now it is possible. The online application process is easy now and all information is available on the website, still, you have doubt then you can call companies toll free numbers. Therefore you should buy a term insurance plan online which is cheaper due to no involvement of agents.

 

Buy online pure term plan: Online term plan provides you high sum assured in a very less premium. You may compare life insurance plans in online portals like policybazar.com. However, it doesn’t give you returns like traditional life insurance policies.

 

Traditional Plan v/s Online Term Plan

In India, the practice of buying a traditional Life insurance plan is quite common because it provides life risk cover as well as investment. People blindly buy these traditional plans without analyzing that these plans are costly due to guaranteed but low returns and therefore these plans are insufficient to provide them sufficient risk cover and returns to meet their financial goals. Instead of this people should buy online Term plans whose premium is much lower and with the remaining amount they should invest in various genuine investment instruments to achieve their financial goals.

 

Let’s understand with this example

Assume your age is 30 years and the monthly salary is approx 50,000 rupees. You have below mentioned financial goals.

· Buying House

· Children Education

· Children Marriage

· Taking care of your retired parents

 

Then you will be required life insurance of sum assured 1 crore.

 

Now we see both scenario

	Traditional Plan	Online Term Plan	Remarks
Premium for 1 crore sum assured	1.20 lakh/ year approx	Max 15,000/ year approx	You saved Rs. 1.05 lakh/year approx
Total premium paid till age 60	Rs. 36,00,000/-	Rs. 4,50,000/-	You saved Rs. 31,50,000/- approx
Maturity value after 30 years	Rs.36,00,000 (Guaranteed) Rs.57,00,000 (4% rate - non guaranteed) Rs. 99,00,000 (8% - non guaranteed) *approx values	Nil	It means you will get between Rs. 36-99 lakh, depending upon profit
Returns from Remaining amt of 1.05 lakh/year by investing in various investment instruments available in market	No  remaining amt to invest	Rs.1,90,00,000 approx	Taking expected rate of  return 10% (we may get more than 10% by good investment planning)

 

 *Premium, returns, and maturity values used in this Illustration is approximately; it may differ from company to company & plans to plans.

We can see in the above illustration by choosing a pure term plan and investing remaining funds in other investment instruments like PPF, Mutual Funds, Stocks, etc we can get sufficient risk cover as well as much higher returns as compared to traditional life insurance plans.

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I hope this article will be helpful. If you have any doubt or queries feel free to write us.