Choosing a life insurance policy can seem daunting at first - deciding the type of insurance, the amount, factors to consider, etc. I faced the same challenges when I decided to buy a life insurance policy. Here's a small guide to shed some light on the topic and help you get closer to choosing your insurance plan.

Today we'll discuss some basic terms around life insurance - its need, benefits, types and we'll further move on to discuss the factors that should be considered while choosing life insurance, suggestions on the type of life insurance one should opt for based on one's requirements and will finally end with  a comparison of the different life insurances out there to give you a holistic idea on which ones to consider.

What is Life Insurance?

Life insurance is a contract between the policyholder and the insurance company wherein the company agrees to pay a lump sum amount upon the demise of the policyholder or after an agreed period to the nominated beneficiary in exchange for a premium.

Need for Life Insurance:

  • Life Insurance provides financial support in case of the demise of the earning member of the family.
  • High coverage is provided for a small premium
  • Some insurances cover outstanding loans in the case of the policyholder's demise which helps prevent any kind of loan burden on the spouse or the children.
  • Most insurances have optional riders, which are add-on benefit options that allow more holistic coverage such as in case of an accident, illness, etc.
  • Some insurances offer lifetime protection options as well.

Benefits of Life Insurance:

  • The younger you are when you buy the insurance, the lower your premium amount can be. Hence, you can get insurance for a cheap price if you buy early.
  • It provides a layer of financial security to you and your dependents.
  • Life insurance also has tax benefits. The policyholder is eligible for a rebate under section 80C of the income tax act 1961.
  • Some life insurance policies can also be used as loan collateral at certain banks.

Types of Life Insurance:

When it comes to life insurance, there are many types available. These can be majorly categorized as follows:

  • Endowment plan: These are the most commonly available ones. Here, the installments that you pay, a portion of it goes towards your life cover, and the rest of it gets invested for a fixed duration. If one is alive by the time your policy matures, they get the invested money returned with appropriate gains. This sounds like a good option on paper, but if the goal is to cover one's dependents in case of their demise, then this may not be the best plan. There are a couple of reasons why:

    • The annual premium for endowment plans is high. This is expected since they are providing you with an investment option.
    • If you calculate the rate of return that you get on the amount you invested via an endowment plan, it comes to 2-3%. You would be much better off investing that money even in a fixed deposit where you get a return of 3-5% with a much more flexible investment period option.
    • Since part of the installment goes towards investment, the cover provided is smaller, i.e., the amount that one's dependents get after their demise is much smaller.

  • Term plan: These are a much better option if you're looking at life insurance as a financial security cover and not an investment option. Here, the entire amount you pay as an installment goes towards the cover, hence you get a much higher cover compared to an endowment plan for a much lower premium. However, you do not get any returns at the end of your policy even if you are alive.

    • Term plans provide a much higher cover than endowment plans.
    • The premium charged for a term plan will be much lesser than the premium charged for an endowment plan for the same coverage amount.
    • The amount you save in premiums by opting for term plans gives you that extra cash that can be invested to make much better returns than an endowment plan would provide.

      • If you're looking for a life insurance product to ensure maximum cover for your dependents with a low annual premium, look for term plans.

  • ULIP: Unit-Linked Insurance Plans (ULIPs) are one of the latest types of life insurance available today wherein a portion of the premium paid goes towards the coverage and the rest is invested in equities, debt, or a balance of both as an investment option.

    • This is a much better option when compared to an endowment plan as it provides the policyholder the flexibility to choose between the type of investment they want to make - whether it's through equity, debt, or a mix of both.
    • However, when compared to a term plan, the premiums are higher and you do not get full control or transparency on the investments being made. You will not know which stocks are being bought or sold in equity and you will not know the expenses and charges levied in the investment portion, whereas you can see all of these if you invest the remaining amount in a mutual fund yourself.

      • So for someone who does not know or want to get into the hassle of finding and tracking the right mutual fund, ULIPs provide a good option to buy a policy with an investment component.

      There are also a few other types of life insurances such as

      • Whole Life insurance plan where one is covered for their entire life, which means the return to one's dependents is ensured, but that also means that one needs to pay a much higher premium
      • Retirement insurance plan where the policyholder receives a pension in case they outlive the policy period.

      What should be the insurance cover amount?

      In general, experts suggest that the cover amount should be 10 to 15 times your annual income. But you should also factor in your age, any kinds of debt your family may have and the number of dependents amongst other factors that may apply specifically to you. It's also important to understand that if you're unmarried or don't have kids, factoring in such future responsibilities is also important to choose the right coverage amount.

      The idea is to provide one's dependents with enough cover to support them financially even after their demise.

      Are Life insurance policies valid if an Indian moves abroad for work/education?

      The short answer is yes. Most policies have global coverage and support the policyholder even if they move abroad - whether it's temporary for work/ higher education or it's for permanent relocation. Some factors such as tax implications and payment processes might need to be evaluated.  

      The idea is if you move abroad, but in the long term plan to have personal interests in India or if you have dependents living in India, then buying a Life Insurance policy in India makes sense irrespective of where you plan to stay.

      It should also be noted that Indian life insurance policies are comparatively much cheaper when compared to other countries. Hence it's better to buy/continue your insurance in India than to buy a new one in the country you are moving to.

      Factors to be considered while buying Life Insurance:

      Some of the key factors one should consider while choosing a life insurance policy are:

      • The reputation of the insurance provider
      • Claim Settlement Ratio (CSR): This is the number of claims paid by an insurance company for every 100 claims that are registered. So if a company has a CSR of 99%, then 99 out of 100 claims registered were paid to the dependents. Hence higher the CSR, the better it is for you.
      • Sum Assured: Sum assured needs to be calculated based on one's financial situation and is an important aspect while choosing an insurance policy.
      • Policy Tenure: The tenure of the policy is flexible and should be aimed till a point in life where you have retired, have your retirement fund/pension sorted and your children have started earning and are no longer financially dependent on you. A tenure anything short of that can cause financial troubles to your dependents in case of one's demise and a longer-term policy forces you to pay much higher premiums. Hence choosing the right tenure is important to ensure a balance.
      • Asset Under Management (AUM): This is the value of funds that the insurance provider manages. A high AUM indicates a good provider with a strong portfolio and satisfactory performance.  
      • Solvency Ratio: This is the company's ability to pay out any long-term debts. A higher solvency ratio means that the company is well prepared to pay out the claims submitted. The mandatory solvency ratio set by the Insurance Regulatory and Development Authority of India (or IRDAI) is 1.5 (150%). This is a good indicator to understand the financial health of the insurance provider.

      Comparison between different Life Insurance providers in India:

      The figures in the below table are as per the annual report of IRDAI 2019-2020:

      Insurer Total Number of Claims Claims Paid Claim Settlement Ratio Solvency Ratio (March 2020) AUM Life Fund (₹crore)
      Aditya Birla Sun Life 5,162 5,035 97.54% 1.78 13,736.78
      Bajaj Allianz 12,127 11,887 98.02% 7.45 28,916.64
      Bharti AXA 1,320 1,285 97.35% 1.86 5,557.65
      Exide Life 5,052 4,978 98.54% 2.1 11,874.82
      HDFC 12,626 12,509 99.07% 1.84 43,622.60
      ICICI Prudential 11,460 11,212 97.84% 1.94 49,093.39
      Kotak Mahindra 3,346 3,225 96.38% 2.9 19,857.67
      LIC 7,58,916 7,33,809 96.69% 1.55 2,253,495.13
      Max Life 15,643 15,342 99.22% 2.07 48,576.36
      PNB MetLife 4,364 4,241 97.18% 1.89 16,923.43
      Reliance Nippon 8,017 7,866 98.12% 1.84 15,682.98
      SBI Life 22,490 21,257 94.52% 1.95 49,890.41
      TATA AIA 2,982 2,954 99.06% 2.35 20,572.09