Secure your family’s financial future with term life insurance. In this detailed guide, we’ll show you how to pick the perfect policy to protect your loved ones.
The Context
Fun is like Life Insurance, the older you get the more it costs — Kin Hubbard
According to the latest Economic Survey released by the Indian Ministry of Finance, only 3 people out of 100 have a life insurance policy in India.
In other words, only 3 percent of the Indian population is currently covered under a life insurance policy.
From a contrasting standpoint, as per ‘Future Generali,’ the top four reasons for death in India are:
≡ Cardiovascular diseases (24.8 percent),
≡ Respiratory Diseases (10.2 percent),
≡ Tuberculosis (10.1 percent), and
≡ Malignant Tumors (9.4 percent).
Apart from the prevention campaigns, medical care, and lessons on self-care, these numbers are strong indicators of how fragile human life can be. This also shows how prepared our citizens are to deal with unpredictability. Not to be taken as a sales pitch, but the best thing you can do to demonstrate to your family that you care about them is to purchase a life insurance policy with enough coverage.
Life Insurance simply protects your family and lets you leave them a non-taxable amount at the time of death.
Click on the link below to read our recommended article on Life Insurance basics. Term insurance is a simple form of life insurance. It provides financial protection to your family at the most affordable rates. With term insurance, you can get a large amount of life cover at a relatively low premium rate. Currently, there are about 24 insurance companies that provide term insurance in India.
With too many permutations coupled with the conviction that’s needed, purchasing a life insurance policy for yourself is not an easy task. This post will provide you with fundamental acumens on how to shop for one.
Your Insurance Needs
The first and foremost consideration to buy term insurance is to evaluate your insurance needs. Also known as a needs approach, it simply means determining how much life insurance is necessary for an individual or family to cover their needs.
There are three prevalent ways to deal with this situation.
1. Multiple-of-income approach
2. Human life value approach
3. Capital needs analysis
≡ Multiple Income Approach
This is by far the sloppiest yet operational method for estimating your life insurance needs. The goal of this approach is to replace the primary breadwinner’s salary for a predetermined number of years. To calculate the insurance coverage needed, you simply multiply your current annual income by the number of years you want to provide financial support to your dependents. The common thumb rule suggests seven to ten years of insurance but then it varies depending on the current age of your dependents and the degrees of their vulnerability.
For instance, if your annual salary is ₹20 lakhs, and you want to provide 10 years’ worth of financial security to your dependents. Simply multiply 20 by 10.
₹20 lakh × 10 years = ₹200 (₹2 crores)
It’s an easy method, but it doesn’t take into account the specific needs of survivors, other sources of funds such as your income and investments; or different types of family structures. This method may work well for a family with one child but might not work as well for a family with three or four children.
It also doesn’t take into account inflation or future salary increases. Using this approach may lead to over-insurance or underinsurance, but it still serves the basic purpose.
≡ Human Life Value Approach
This is a more sophisticated version of calculating your insurance needs. This method considers your age, gender, occupation, current, and future earnings, and employee benefits. There are several steps to determining your overall value if you were to conk off today. To calculate HLV, you first need to estimate your earnings from now until a set point in the future — typically your expected retirement age.
Be sure to factor in future salary increases as well.
💬 Subtract your annual taxes and living expenses from the total.
It’s usually safe to assume that 20-30 percent of your salary will go to taxes.
💬 Now select an assumed rate of return on the remaining total and subtract it from the gross amount.
In other words, subtract the interest you expect the money to earn.
💬 Add the cost of additional benefits provided through employment, such as health care, that will need to be replaced in case of death.
Again, remember to account for inflation. The primary goal of this method is to replace the income lost. It doesn’t necessarily account for your children’s educational expenses or other specific future needs.
You may click here to calculate your HLV; a calculator courtesy of Tata Capital Wealth.
≡ Capital Need Analysis
The capital needs analysis is the most widely used approach for estimating life insurance coverage. In addition to replacing your salary, it also accounts for other sources of income (like rentals or dividends) and the specific needs of survivors.
This method factors in —
💬 Current and future income of both the insured and surviving spouse or caretaker
💬 Immediate lump-sum cash needs upon death, such as debt repayment, and mortgage payoff
💬 Future expenses such as college fees, weddings, long-term care expenses, and retirement funding
💬 Existing family assets, retirement funds, or insurance policies
Once all future needs are taken into consideration, there are then two ways to calculate how much insurance you need, based on how you would want your survivors to utilize the funds in the future.
Earnings Only Approach — The survivors will live off only the investment earnings of the policy without cashing in the principal value. This method is preferable if you want funds to be available for your children after the secondary caretaker also dies. Like any investment, this method is subject to the risk of changing market interest rates. To provide a sufficient income stream, the death benefit is usually significantly higher than in the liquidation approach.
Liquidation Approach — The surviving beneficiary utilizes a portion of the principal as well as the investment earnings.
There is more risk with this approach, particularly if the investment earns less than originally predicted. The surviving spouse or caretaker may not have sufficient income to live on for the remainder of their life. No matter which method you use to figure out how much life insurance you need, it’s always a good idea to have an initial estimate of what the survivors will require in terms of money in the future to make sure the policy will support them.
Affordability
Several specific characteristics can assist you in purchasing term insurance at affordable prices, even though you have very little control over receiving discounts on these policies.
1. Buy the policy at an early age — Age adds risks to your life thus commanding more premiums for coverage.
You should buy life insurance as soon as you can afford the premiums.
2. Do not add unnecessary riders — Riders are add-on coverage packs that are specific to different individuals.
Always assess your needs and circumstances before going for the most suitable riders. Bloating your insurance with everything available will lead to exponentially higher premiums.
3. Don’t Smoke — Non-smokers always get a significantly cheaper quote than smokers.
This should very well double up as a motivation to quit smoking if you are into it.
4. Go Direct — Selling insurance is a highly profitable and competitive business that is often favored by thousands of discriminatory salespeople and intermediaries. While listening to a free sales pitch usually helps in quickly understanding the underlying complexities, it is advisable to directly approach the insurer to buy life insurance.
Avoid becoming a victim of deceptive selling.
5. Shop At Ease — Instead of getting fixated on advertisements, influencers, or choices made by your friends, you must research and compare all available options by yourself. Besides, there are hundreds of online portals available these days to compare insurance offerings.
Claim Settlement History
Before purchasing insurance from an insurance provider, it is crucial to investigate the provider’s claim settlement history. When a life insurance policyholder passes away and an insurance claim is made, the insurance companies follow certain rules and conditions before settling the claim. There could be numerous reasons that an insurance company may reject claims such as fraud, falsification of information, impersonation, or misinterpretation. For ease of understanding, this metric is also referred to as Claim Settlement Ratio (CSR).
Expressed in percentage, it’s a ratio of the number of claims paid to insured customers by the insurance company against the total claims received by the company.
Claim Settlement Ratio = (Total claims approved and paid)/(Total claims received by the insurer)*100.
It is a higher the better metric that measures an insurer’s liability. As per industry standards, a claim settlement ratio of more than 85 percent is considered acceptable, to begin with. But insurance companies having a high ratio of more than 90-95 percent is always better than an acceptable option.
Many insurance companies such as HDFC Life, Max Life, Aegon, ICICI Life Insurance, and LIC claim settlement ratios consistently remain above 95 percent.
As per IRDA claim settlement annual report published in December 2021, select five insurers with the highest CSR are —
👉 Max Life (99.35 percent)
👉 Aegon (99.25 percent)
👉 Bharti Axa (99.05 percent)
👉 LIC (98.62 percent)
👉 Paramerica Life (98.61 percent)
Persistence Ratio
Be sure to look at the persistence ratio. The persistence ratio merely displays the proportion of policyholders who paid the renewal payment.
This ratio shows the policyholder’s trust in long-term insurance products and the services offered. It is calculated in typically the 13th month as the percentage of the insurer’s total insurance policies that remain in force without being lapsed during a financial year.
The 2021 persistence ratio median of the top five private insurance players in India stands at 87.1 percent. This ratio is usually available in insurers’ brochures, IRDA publications, and also on the insurer’s websites. A constantly falling Persistence ratio is an evident sign of falling trust.
Solvency Ratio
This is similar to what we cover in our fundamental analysis module when determining if stocks and businesses are worthwhile investments. A company’s capacity to fulfill its debt obligations and other financial commitments is gauged by its solvency ratio. Simply put, the insurance firm must be in a solid financial position for the insurer to be able to offer this financial protection.
It’s a higher the better metric. Meaning, that the lower an insurer’s solvency ratio, the higher the chance that it will default on its financial obligations. Conversely, an insurer with a high solvency ratio indicates its financial reliability.
It is more capable and hence more likely to fulfill its debt and other commitments. The Insurance Regulatory and Development Authority of India (IRDAI) is currently responsible for ensuring that Indian insurers are upheld to certain standards, including a mandated solvency ratio.
As a result, life insurance providers in India are expected to maintain a solvency ratio of 1.5 (or a solvency margin of 150 percent). To determine the ideal life insurance provider for yourself, you can browse through the solvency ratios of all registered insurers in the annual report published on the IRDAI website.
Tax Benefits
The tax repercussions of purchasing a life insurance policy should also be taken into account when picking a plan. Tax treatment on life insurance premiums and payouts is complex and it varies in line with permutations and individual situations. Generally, all premiums paid for life insurance plans are eligible for tax exemption under section 80 C of the Income Tax Act. It allows a policyholder to avail of a maximum benefit of up to ₹1.5 lakh, making this one of the key benefits of life insurance.
Moreover, the death benefits paid to the nominee are exempt from tax under Section 10D of the Income Tax Act. Before purchasing insurance with your prospective insurer, you must confirm the supporting information.
Depending on your existing situation, this will assist you in developing a more straightforward grasp of tax benefits and other ramifications.
Conclusion
Term insurance is a crucial tool for protecting your long-term investment objectives and for protecting your loved ones in the event of an unforeseen circumstance. Term insurance is a complex offering but over the years, the competition across this sector has drastically evolved this instrument into an easy buy. There are no legal limits as to how many term insurance policies you can own as long as you are furnishing your income proof and can pay the premiums. However, almost all firms request original documentation during the claim process, such as a death certificate, which might be challenging to obtain in duplicate.
When purchasing numerous policies from various firms, you must give some consideration to this thought. With dozens of insurers offering hundreds of variations, it’s always wise to make informed decisions while keeping them as simple as possible for the sake of your successors.
Last but not least, when filling out the forms and disclosing sensitive information like your habits, pre-existing medical issues, and income, please pay close attention to the instructions. A misinterpretation of facts can unnecessarily compromise the claim process putting your dependent’s survival in the soup.
Hope you enjoyed reading this guide.
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1 Comment
I want to buy term insurance but I am a smoker. I checked online and the difference between smoking and non-smoking is huge. Please suggest a cheap and alternative choice.