Choosing the insurance policy best-suited to one's needs and requirements is a difficult task. According to the Insurance Regulatory and Development Authority (IRDA), the life insurance sector in India has grown tremendously since the entry of private life insurers. The market has also seen a lot of changes in products and services. Life insurance policies are long-term contracts, ranging from 10 to 25 years. It is important to choose the right plan to meet your requirements. Unit-linked policies have several advantages such as flexibility, transparency, simplicity, liquidity and efficiency in fund management. These policies are adaptable to the changing needs of the insured over their lifetime. Unit-linked plans, by their very structure, tend to be more efficient in their charge structure. The high level of disclosures required in these plans is an automatic check against an inefficient charge structure, though in long-term contracts, charges get levelled out over a period of time.
In choosing a policy, it is important to choose the life insurer first. The factors that matter are the promoters, customer service, performance track record and the product portfolio. An understanding of one's own financial needs, taking into account the life stage, risk profile, dependants, disposable income and liabilities will identify the protection and savings needs for the person. The protection should cover all the liabilities and future earning potential of the insured. This will ensure that the dependants' lifestyle is not significantly altered if anything unfortunate were to happen.
Amount of insurance required
The amount of insurance required is a factor of the future earning capacity of the individual along with the assets owned and liabilities owed. Insurance is not static and needs to be reviewed by each person at different stages in life. The amount of insurance required changes with factors like income of the family, assets and liabilities of the family, size of the family, number of dependants in the family, and stage of life of the dependants. The person planning to take up insurance has to do a complete need analysis to arrive at the right type and amount of life insurance cover.
It is also recommended that you review your insurance needs every two years to take into consideration any change in earning capacity, profile of dependents, cost of living, increased liabilities like housing loan, personal loans or increase in disposable income to ensure that the life insurance cover is adequate. The savings portion will be determined by the financial goals of the individual.
As an investment instrument, life insurance enjoys several distinct advantages. There is very little or no risk of capital loss, the long-term nature of the contracts ensures that investment horizons are long-term, thus, leading to efficient funds management. The regular nature of savings and the benefits of compounding ensure a substantial corpus over a period of time.
The differentiating factors are flexibility, transparency and the customisation possibilities that are available in the product. These aspects are crucial so as to ensure that the product adapts to the changing financial needs of the insured. Participatory policies are less flexible and adaptable. Be certain of your milestone requirements and time the purchase of your policy accordingly.
Also, consider buying multiple policies to meet different needs. These policies are restrictive and do not provide the option to rebalance the proportion of life insurance and savings within the policy.