Understand your insurance need : An analysis and understanding of our need is the most important step of any decision making. Buying life insurance is no exception. Foremost, we must try to understand that one reason for which we want to buy life insurance – am I into life insurance to build some savings for my rainy days or my purpose is to provide my family with a strong financial cover in case of my untimely/early death? Savings through life insurance is a vast subject in itself and we’ll take it up in detail some other day. Today’s article is more from the perspective of pure term insurance which caters to the 2nd need identified above i.e. build a strong financial cover for the family in case of an eventuality. To ensure that we buy the right term insurance we must understand 3 variables – a) how much sum assured should I buy, b) what should be my policy tenure, and c) what premium payment frequency should I choose so that I can keep paying all my due premiums on time without hurting any of my other liabilities.
Understand how you would want the payouts to come to your family at the moment of reckoning: This is more important than most realise. Not all individuals are equally savvy with money. Please do an honest assessment of how savvy your spouse and children are and then decide if you would want the entire term insurance payout to come in lumpsum or in staggered instalments. Financially savvy families can opt for lump sum payment of sum assured as they are more likely to manage their money judiciously through right investments. The other kind of families would be better off getting a part of the sum assured as a lump sum and the balance in the form of a monthly income for 10 to 15 years. Many insurers now give the ease of choosing your preferred payout option - lump sum payout, deferred payout or a combination of both.
Compare products on neutral third party portals: It is always prudent to shop around a bit before you commit yourself to a long term product like term insurance. This would give you a good idea of the comparative options available to you. Alongside premium, one should also compare policies on value-added features like availability of riders. Such riders as critical illness, PA cover can give your term insurance policy a comprehensive shape by just adding a marginal amount of premium. It is also good to compare term insurance products on exclusions (events that are not covered by your term insurance policy). This would give you and your dependants a very good idea of what to expect in the event of a claim.
Select your insurer: Choosing your insurer is equally important as any of the other steps involved in prudent term insurance purchase. It is important that you select your insurer on the basis of their ability to pay claims. This can be judged by analysing the financial strength of the Insurers’ balance sheets and looking at their past claims settlement record. Although it may sound difficult to beginners, it is highly possible to find this information if one spends some amount of quality time and do their homework. IRDAI publishes an annual report on Insurance industry at the end of Q3 every year and the same is available on www.irdai.gov.in. This report gives all-important statistical information about Insurers that one may need to assess book strength and claims settlement record. Key ratios to look for are solvency ratio, claims paid ratio, claims pendency ratio, etc.
Evaluate if you should book your life insurance policy under Married Women’s Property Act 1874: We buy term insurance for the benefit of our family in case of an early demise. By buying term insurance under the MWP Act of 1874, we can ensure that the intended benefits are indeed accrued to our family (wife and children) and not attached by any court. This could be very important for businessmen and/or Joint families who have a complicated/unclear heritage. Section 6 of this Act highlights its importance: "a policy of insurance effected by any married man on his own life and expressed on the face of it to be for the benefit of his wife, or of his wife and children, or any of them, shall ensure and be deemed to be a trust for the benefit of his wife, or of his wife and children, or any of them according to the interests so expressed, and shall not, so long as any object of the trust re-mains, be subject to the control of the husband, or to his creditors, or form part of his estate." Life insurance policy can be bought under the MWP Act by filling a simple form at the time of Life Insurance purchase. One must remember that Life Insurance policy can’t be amended to be attached under the MWP Act once the policy has begun. So it is important to assess the need to buy your life insurance under the MWP Act right before purchase.
Asad Akbar is the Principal Officer of Coretree Insurance Brokers India Pvt Ltd.
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