Buying life insurance? Choose the right plan

Insurance, nowadays, is no longer restricted to the traditional term plans or whole life policies. The opening up of the insurance sector in the last decade, has brought with it companies, offering a variety of choices with a range of plan features. This could be a plain life cover, or a pension plan with regular streams of income, or a money back policy for family commitments.

So which one should you opt for? InvestmentYogi gives you an easy guide to help you through your buying process.

Do you need life insurance?

If you have loved ones dependent on you financially, the answer is 'yes'. A peek into why it is needed is below:

• Financial support for your family in case of your unfortunate demise
• An investment tool to save money for your children's education, marriage or your retirement
• Could prove to be a tax saving option too

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Knowing what your need is and an understanding of your financial position helps in choosing the right plan. Here is how you go about doing this.

Evaluate your need for insurance

List your requirements on a priority basis. A life cover should be on top of the list of requirements. You may also aim to save tax or may require money towards a future financial commitment.

Understand your assets and liabilities

Your current assets and liabilities would help you assess how much insurance you would need. Ask yourself these questions to help you in the process.

• What is my family's current lifestyle expense?
• What do they inherit when I am no more?
• Definite expenses in future such as marriage or education of children

When do I buy insurance?

Individual insurance needs change with every stage in life. However, the known fact is that the earlier one buys a life cover, the cheaper it works out for him. So opting for a life insurance even if you are currently a young professional is a wise option.

The following details will help you understand which type of plan would suit you best.

Term plan

Basic feature: Life cover for a limited period. Claim is paid to the family, only if the assured dies within the insurance term.

Cost and premium collected: Low cost plan. Premium is collected till the end of the insured term.

Suitable for:  Individuals seeking complete risk cover during a specific term, with no element of saving or investment.

Whole life plan

Basic feature: Life cover for the whole life. Claim is paid to the family on death of the assured, irrespective of when it happens.

Cost and premium collected: Cost of plan slightly more than term plan. Regular premiums to be paid till either retirement or death of the individual.

Suitable for: Individuals seeking complete risk cover during a specific term, with no element of saving or investment.

Endowment plan

Basic features: Sum assured paid to family if policy holder dies during the policy term, or if policy holder survives the entire policy term.

Cost and premium collected: Higher than the earlier plans, as this comes with a savings element attached. Premiums are higher than term plans, as a part of the premium is used to generate profits or bonuses.

Suitable for: Individuals desiring additional savings in the form of bonuses and profits, along with the sum assured.

ULIP

Basic features: Combination of a life insurance and a mutual fund. Returns on maturity could vary depending on the performance of the underlying fund. On death nominee receives the fund value or sum assured whichever is higher.

Cost and premium collected: Most expensive of the plans. Premiums are higher as a part is used to invest in a fund, and a part for life cover.

Suitable for: Suitable for people with a high risk appetite seeking wealth creation and insurance cover requirement.

As a general rule here are a few points you must keep in mind while buying life insurance plan for you and your family.

• After you have decided on the right kind of insurance, do a comparative study of similar policies being offered by different companies.
• Ensure that your premium amount and premium frequency is within your ability to pay.
• Check with the insurance company on the additional benefits offered, such as an accident rider, a critical illness rider or maybe an option later to convert an existing term plan to a whole life plan.
• Read the fine print on the policy carefully and ask the company or your agent to explain anything that is not clear to you, before you sign the offer document.

A final word

• It pays to review your income changes and needs, if any, regularly, to ensure that you're getting the most out of your life insurance.
• Section 80C of the Income Tax Act provides a tax benefit on the premiums of Life Insurance policies and Pension Plans. The benefit may be better utilized if you enter the insurance plan at the beginning of a financial year.