Life insurance: How to choose the right policy

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Life insurance is important for those who have people in their lives who depend on them financially. In case of the breadwinner’s unfortunate demise, the family or beneficiary will receive financial compensation. This payout can be a blessing for someone who is left without a stable income.

How to choose the optimum sum assured

Life insurance offers different payout methods such as a lump sum compensation, a monthly income, annual income, or a combination of the lump sum plus income. In many cases, people are not insured for an adequate sum. On the other hand, there are some who insure themselves for amounts much more than required. Calculating this sum can be tricky. Let’s take a look at ways to accurately calculate your ideal sum assured. But first, we need to understand what it is to be uninsured, under-insured and over-insured.

Uninsured: A person who does not have a life insurance policy doesn’t lose anything upon his death. But his family will be at a financial loss in his absence. To provide adequate financial support, paying a small premium is worth it.

Under-insured: Taking into account the family’s future needs, one must also account for inflation and rise in the standard of living. If a person is insured for Rs.50 lakh, but his family’s needs amount to Rs.1 crore, then he is short of Rs.50 lakh.

Over-insured: If a person takes out a policy for Rs.3 crore when the family’s needs are only about Rs.1 crore, then he has overshot the required amount by Rs.2 crore. One may think that this shouldn’t be an issue because at the end of the day, the family will get a higher amount. But considering that a higher sum assured will also carry a higher premium, the extra premium amount could be invested in more lucrative avenues.

Factors to consider while calculating insurance

●Current Income

●Spouse’s income

●Current expenditure

●Future needs


●Debts and liabilities

●Rise in standard of living

Methods of calculating insurance amount

Income Multiple – Take your current income, and multiple it by 10 or 12. This will give you a good estimate of your ideal insurance amount. For example, if your annual income is Rs.6 lakhs, your ideal life insurance should provide you with Rs.60 lakhs to Rs.72 lakhs.

Income Replacement – This method takes into consideration the current income plus the number of earning years left before retirement. If the person’s current income is Rs.5 lakhs and he/she has 20 years of working life left, then the ideal insurance cover would be Rs.1 crore.

Need Analysis – This method takes into consideration the needs of the family and the future goals planned out. Estimating day-to-day expenses, regular requirements such as rent, healthcare, groceries, utilities, loan EMIs, and then also considering future milestones, one can arrive at a figure of how much is required to live the same lifestyle. This method also factors in inflation, current savings, and investments held by the insured.

Taking a life insurance plan is a good step to secure your family’s financial needs when you pass on. Term insurance plans also provide large sums assured for very low premiums. The money saved on investing in a term plan can then be invested in more fruitful opportunities.

Factors that affect life insurance premium

While taking out a life insurance policy, it’s important to know what would affect your premiums and what wouldn’t. This way, you can get lower premiums for better coverage. Some of the factors that influence life insurance policies are listed below:

Age – The younger you are, the less risk it is for the life insurance provider. Therefore, premiums are much lower. If you opt to take a life insurance policy after your 20s, your premiums will be significantly higher.

Gender – According to statistics, women have the tendency to live longer than men by about 5 to 7 years in India. So, women are granted lower annual premiums than men. The reason for this is that insurers feel women would have to pay for more number of years.

Family history – The medical history of the family will play a pivotal role in determining your premiums. A history of heart disease, hypertension, cancer or diabetes can push your premiums up. Genetic or hereditary conditions will also have an impact on your life insurance.

Smoking – Smokers directly get a higher premium for reasons that are obvious. Smoking is known to cause a number of cancers and deaths across the globe. Insurance companies offer lower premiums for non-smokers and also give discounts on premiums for those who quit smoking.

Alcohol – Drinking habits can also impact your premium. Alcohol can affect your lifestyle and also going overboard can affect your health.

Kilos – Being overweight can lead to a serious of health risks at a young age. Obesity is a killer and the issue is taken seriously by insurance companies. Having a body mass index (BMI) of over 30 is not ideal for the insurance provider. Losing weight can help reduce your premiums.

Livelihood – Your occupation could potentially increase your premiums if your work is hazardous in nature. White collar jobs usually don’t pose significant dangers to health and life. Blue collar jobs, generally, carry a higher health risk.

Lifestyle – The way you live your life could also be a determining factor in life insurance. Those who indulge in adventure sports such as bungee jumping, cliff hanging, tightrope walking and so might face higher premiums.

Life insurance is an important investment for those who have dependents. Life insurance premiums are considerably affordable and give comparatively large sums assured. However, the premium rate for one person may not be the same for another person. Various factors such as age, gender, medical history, and lifestyle affect premium rates. Even among two people who are the same age, premiums may differ if one is a smoker and the other is a non-smoker. For someone who has a home loan on their shoulders, a life insurance plan can ensure that the dependents do not have to carry that burden if the breadwinner is no more.

Before you take out a life insurance policy, it is important to do your own research. Agents can help guide you to an ideal policy but it is advisable to do your own study. View and compare insurance policies before you make the decision.