Guide to Choosing a Life Insurance Policy

In today’s world of uncertainties, a life insurance policy is an absolute necessity. It provides the much needed financial security in times of any unforeseen event such as death of the bread winner. It supports the family in the need of the hour. Today, life insurance policies have evolved into a variety of forms. From pure term plans, to investment linked protection plans, the options available are plenty.

Know Your Options

All life insurance policies work with a similar aim- of providing your family/dependents a pre-determined sum of money in the event of your unexpected death. Apart from this basic and vital nature, some policies also provide certain extra benefits catering to the diverse needs of policy holders. We could broadly categorize the options available into the following kinds.

Plan Type What You get Key Advantages
Pure protection plan(Term Plan) Protection in the form of sum assured, paid out only if death occurs during term of plan.

Term ranges between 5 to 25 years.

No survival/maturity benefit.

Characterized by low premiums

Expect a higher coverage at a much lower cost

Endowment plan Combination of savings and insurance

In case of death during tenure of policy, benefits paid out to dependents.

In case of survival of policy holder, maturity benefits paid out

Opportunity to build wealth along with protection

Policy holder is also entitled to bonus

Whole life plan Though called “whole life” in reality these plans do not offer a life cover for your entire life span, but till maturity of the plan. It combines risk coverage with investments.

Post maturity, the policy pays out maturity benefits to policy holder.

Unit linked plan Combines investment plus insurance.

Part of the premium paid is invested in equities or bonds and another part is used towards life insurance.

Involves a risk element, on the basis of the underlying funds invested in

Opportunity to invest in the capital market along with getting protection
Money back plan Pays back a certain percentage of the sum assured at pre-determined intervals- after 5 10 & 15 years.

Typically a savings – investment plan

Pay-outs at important life events such as children’s higher education, marriage or retirement.
Pension Plan Designed to provide a regular source of income post retirement.

Premium is paid during working years to get annuity in later years.

Option to commute 1/3 on retirement.

Secures retirement life with a steady stream of income

Making Your Choice

The decision on the kind of life insurance policy should be based on one’s individual financial needs. Each of the broad categories fulfills a unique need- whether one is looking purely at protection, or seeks a more comprehensive retirement plan. The choice depends on preferences, the life stage one is in, and the financial commitments. Before we make a choice:

Determine how much life cover you require: We commonly use the Human Life Value (HLV) for this. Though it may sound technical, in simple words, it is your life’s worth, in rupee terms.

  • Ask Yourself These Questions
    • Years till retirement: What would be your age of retirement and for how many more years you would have to provide for your dependents.
    • Number of dependents: Not just the number of dependents, bear in mind to list out their individual financial goals that you wish to save for.
    • Your current income expenses- What’s your monthly household expenditure- on children, household and lifestyle expenses.
    • Loans and liabilities- Loans such as home loans, personal loans and even credit card dues if any should be included.
    • Existing investments and savings: What are your assets and savings?

What’s Your Life Stage: In different life stages, your requirements, and financial commitments may be different.

Unmarried and single (24 to 35 years): A stage characterized by low family responsibilities and lesser savings. You may opt for a longer duration term plan of say 15 years. You should also simultaneously start investing early in life. The earlier you start the more are your gains from investment due to the power of compounding. An endowment plan for the long term may also be considered to incorporate savings and insurance together. But do remember, premiums in this case would be higher than term plans.

Married with small kids (35 to 45 years):  This is a stage with responsibilities and financial goals shaping up. You should opt for a comprehensive insurance cover at this point in life. Along with the base plan, riders may be additionally opted for to enhance protection. This is also the time when you should get your financial plan in place, for future goals and retirement. Depending on your risk appetite, you could either opt for an endowment plan or, if you have a reasonable to high risk appetite ULIPs may also be considered.

You could opt for any annuity plan to provide for a regular source of income post retirement.

Middle age till retirement (45 to 60 years): Though this may be a stage where you are almost on the verge of meeting your financial goals, having a life insurance is still a necessity at this stage. For those with steady investments in alternate avenues, a simple term plan should suit. Opting for a fresh policy at this stage may get to be expensive. Thus, term plans may work out far effective on the pocket.

Schemes to Pick- Know Your Risk

For those opting for investment-insurance plans, such as endowment or ULIPS, choosing the right scheme depends on the risk appetite.

Investment based insurance plans are subject to:

  • Market risk: The ups and downs in the capital market.
  • Lack of guaranteed returns- Because the performance of the fund determines the gains or losses, there is no guarantee of returns. This is the risk the investor would have to bear.
  • Liquidity Risk: A lock in period initially of 3 to 4 years. Liquidating in this period may entail you to a loss of investment. Besides, in case when fund performance is low, your gains may be restricted too.

The different fund options cater to varying degrees of risk appetites. You could choose the one that suits your individual profile.

  Equity Funds  Debt Funds Money Market Funds Balanced Funds
Invests in Stocks and shares Fixed income such as bonds and government securities Bank deposits, cash and money market instruments Combination of equity and debt investments.
Risk High risk Low to medium risk Low risk Medium risk
Primary Aim Capital appreciation Capital preservation For short term investors Capital preservation with moderate levels of capital appreciation

Are Investment based Insurance Plans for me?

You should typically not look at investment plans if: 

  • You are a short term investor: Not only are your gains restricted, it works out expensive on the pocket too. The commissions in the first year are around 18%, 7%in the second year and 4% thereafter.
  • When liquidity is a priority: There is a lock-in period of 3-5 years during which time units cannot be sold. So if you are looking out for a more liquid option such plans are not meant for you.
  • When you want a larger insurance cover at lesser cost.