- Date : 23/08/2020
- Read: 4 mins
Why is life insurance important? How should you select a policy? What are the various options you have? Find all answers here
Ask around and most people will confidently tell you that they have a life insurance policy. However, dig a little deeper about the nature of the policy and the cover they enjoy, and the chances are that they will be riddled with doubt and ignorance.
While this scenario is better than not being insured at all, even incomplete knowledge can pose a problem. Most of us have a vague idea about life insurance but only a few know the intricacies involved with it.
Life insurance offers a protection cover against the life of the insured. An insurance company provides a lump sum amount to the nominee of the insured in the event of unfortunate circumstances, subject to regular payment of premiums. Certain types of life insurance also help you save for the future by helping you reap benefits in your lifetime.
Life insurance involves an insurer and an insured. Its working can be explained with the help of the following diagram:
Step 1: Identify your needs
Once the decision to purchase a life insurance policy is taken, the first step is to determine the coverage needed i.e. the amount that the beneficiaries will receive in case the life assured is no more. Life cover should depend on several factors including the age and number of the dependents, existing assets and liabilities, among other factors.
Step 2: Select the right policy
Once the needs are identified, select a policy type that will meet your goals. Today, there are many types of life insurance products available. Choosing the right one to fit your needs is critical.
The cheapest life insurance is a term policy. While inexpensive, it provides a huge cover. However, this is a pure risk cover, which means it only gives death benefit. The pay-out only goes to your nominee. As the insured, you do not personally gain from it.
Then there are endowment plans. An endowment life insurance comprises part insurance and part savings. A part of the payment is used for insurance, while the rest is invested by the insurance company. On finishing the term of premiums, the insured gets a maturity benefit in their lifetime. Additionally, there are also periodic bonuses that come their way.
Another great option to choose from is a Unit Linked Insurance Plan (ULIP), a combination of insurance and investment. Here, depending on your risk appetite, you can choose between different funds provided by the insurance company. The company, in turn, invests in debts, equities, funds, etc. The risk here is higher than that of an endowment plan, but then so are the returns.
Step 3: Apply for the policy and get a quote
After selection of a suitable plan, you have to complete an application form and apply for a life insurance policy. Remember that life insurance is not an off-the-shelf, one-size-fits-all service. It will be customised as per your financial, medical and family details.
It is extremely critical that you provide authentic details for every question. If false information is found, claiming the policy will get challenging. Either the pay-out will be stalled or your nominee may end up not getting it at all. There could also be legal repercussions.
Based on factors such as age, gender, health, medical history, occupation, education, financial background, personal habits, hobbies, etc., the insurance company fixes the insurability and a premium amount.
Step 4: Pay premiums regularly
The next step is to pay regular premiums. In order to ensure uninterrupted cover and other benefits, it is important to never default on premiums. Delayed payment will lead to complications such as paying fines. Many missed payments could go on to mean a lapsed policy.
One can pay premiums at varying frequencies like monthly, quarterly, half-yearly or yearly. Payments can be made online or through cheques.
Step 5: Avail of the benefits
Paying death claims and maturity benefits is the primary responsibility of an insurance company. In fact, they have an obligation to settle claims promptly. In order to file a claim, a form needs to be filled and sent to the company. Relevant documents such as the original policy document, KYC details of the beneficiary, death certificate of the life assured (in case of death claims) are to be submitted to your insurer to support the claim.
In case of maturity benefits, the insurance company will usually send an intimation to the policyholder providing details about the maturity amount payable. The policyholder must sign the discharge document (a kind of a receipt) and send it to the insurance company along with the original policy papers.
Life insurance is not ‘good to have’, but a ‘must-have’ for men and women of all ages. The earlier you start, the better and more cost-effective it is. Buying life insurance not only helps you save but it also buys you peace of mind. Follow the steps outlined above to safeguard the future of your family.