How to choose the right insurance policy

With the increasingly uncertain times, especially tumultuous financial markets and fragile economies, getting an insurance cover for you and your family has become imperative.

Choosing the right kind of insurance cover not only determines the care that we receive should our health take a wrong turn, but it can be the wild card in your financial plan. There are many benefits of an insurance cover. However, topping the list of benefits is the financial support that a family gets in the event of the untimely death of the income provider. While getting an insurance cover is an important aspect of a sound financial future, choosing the right insurance cover is equally important.

First and foremost, choosing an insurance policy must be based on your current and projected income, or simply put your current and projected ability to pay the insurance premiums, your medical state, your age, future financial plans, etc.

Secondly, you also need to look at:

Cost-benefit ratio
The cost of the insurance cover depends upon many reasons, some mentioned above and other factors depending on what is covered in the cover or its riders. Thus, you have to keep a close eye on the cost of buying insurance and ensure that it justifies the benefits covered under the policy. Simply put, a right balance must be struck between the cost and benefits available.

You need to ensure that the insurance covers all your dependents and that it also covers the majority of health problems.

Thirdly, the promises made by different insurance companies are all fine. However, it depends on you whether you need a pure insurance cover or you need an insurance cover coupled with an investment opportunity. The four major kinds of insurances that most people opt from are:

Term insurance: Term life insurance or term assurance is life insurance which provides coverage for a limited period of time.

Endowment policy: An endowment policy is a life insurance contract designed to pay a lump sum after a specified term (on its maturity) or on death, whichever is earlier.

ULIPs: Unit-linked insurance plan (ULIP) provides for life insurance, where the policy value at any time varies according to the value of the underlying assets at the time.

Money-back policy: Unlike ordinary endowment insurance plans where the survival benefits are payable only at the end of the endowment period, money-back policies provide for periodic payments of partial survival benefits during the term of the policy.

When comparing between these plans it is important that you keep in mind the factors that were talked about in the first point. Let's take a look at an example:

Arun is a 25-year-old businessman who wishes to take an insurance cover for Rs 20 lakh for a period of 20 years. There are two options he can choose from.

Option 1: He can opt for an endowment/money-back policy and pay a premium of Rs 90,000 annually. If he survives through the policy term, he shall be eligible to receive the entire sum assured and vested bonuses, if the same are declared by the insurance company.

Option 2: He pays Rs 4,000 annually and enjoys the risk cover of Rs 20 lakh. Being a term insurance cover, he is not eligible to gain any survival benefit from the insurance company and the insurance premium paid can thus be treated as the cost of covering his life for 20 years.

Whereas under Option 1, he has earned an annualized return of about 6 per cent, Option 2 gives him about 9 per cent returns during the period. Therefore, it is important for Arun to decide what he wants and opt for a plan accordingly.

It's important to correctly identify your dependents' financial needs to establish just how much life insurance cover to arrange. A general rule is to choose a policy providing at least ten times your salary, but more may be appropriate, with the amount varying depending on how you intend it to be used.

Basically you decide how much you want your dependents to receive in the event of your death, and your premiums will be determined accordingly. Hence, make sure you keep all these factors in mind, compare different plans and choose your cover accordingly.

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