Risk Coverage in Life Insurance

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Life insurance plans, regardless of the type of policy you purchase, provide financial security to your dependents. In case the life assured passes away during the policy tenure, a death benefit will be paid to the nominee. For a life insurance policy to benefit your nominee, it is vital that you choose an adequate sum assured amount.

What is life insurance?

Essentially, a life insurance policy is a contract between an insurance provider and a policy buyer. The policy buyer pays a premium to the insurance company, and the insurer, in return, provides a risk cover against death on the life of the policyholder. Thus, a payout will be provided to the beneficiary if the policyholder succumbs to an untimely death.

There are various types of life insurance products available in the market, such as term insurance plans, whole life insurance plans, ULIPs, endowment plans, child insurance plans, annuity plans, group plans, etc. You can opt for a particular type of life insurance product based on your stage of life, premium payment ability, financial goals, and coverage needs at time of purchasing the policy.

Tips to determine the right risk cover

While purchasing a life insurance policy is important, it is all the more important that you choose a sufficient life cover. Listed below are certain factors that you should consider while choosing the sum assured.

• Current Annual Income:Since the payout provided by a life insurance plan can act as income replacement in the event of the policyholder’s death, it is vital that you consider your current annual income when deciding your sum assured. It is highly advisable to opt for a sum assured that at least equals 10 times your current annual income.
• Monthly Expenses:Your premium payable is linked to the sum assured that you choose at the time of purchasing your policy. Opting for a high sum assured will result in you having to pay a high premium. Thus, make sure to calculate your monthly expenses and determine how much you can afford to pay as the premium.
• Inflation:Given how rapidly the cost of living has been increasing every year, it is essential that you take inflation into account when opting for the sum assured. Essentially, the sum assured that you opt for today should be sufficient to meet your beneficiary’s needs in the future.
• Liabilities and Debts:You will need to check how much you owe to creditors/lenders in the form of loans and debts to accurately arrive at the right risk cover. The sum assured you opt for should be sufficient to pay off all your liabilities without causing any hassle to your loved ones.
• Assets and Investments:Make sure to calculate the total value of all your investments and assets before opting for the sum assured. If you have sufficient savings and investments, you don’t have to opt for a high risk cover. On the other hand, if you haven’t saved or invested adequately, you will need to select a large sum assured accordingly.
• Future Obligations:The sum assured that will be paid upon the policyholder’s death will help one’s dependents meet both short-term and long-term financial needs. Thus, when opting for the sum assured, it is essential that you take future obligations like your child’s education needs, wedding-related expenses, healthcare needs of your family members, etc. into account.

Other things to consider

A few other things that you should consider when purchasing a life insurance policy are:

• Policy tenure:Ideally, the policy tenure that you opt for should be sufficient to meet your coverage needs. Most policy buyers opt for a policy tenure that matches their employment years. However, if you want coverage for a longer duration, you can opt for a whole life plan, which will provide coverage for your entire lifetime.
• Enhancements:Many insurance providers offer policyholders the option to make enhancements to the sum assured during certain key milestones in their lives. This is a good option to have since you might need to increase your risk cover if you decide to get married or have a child.
• Riders:Insurance providers usually offer riders to policy buyers to help them customise the policy to meet their exact needs. Thus, keep an eye out for the riders offered by an insurance firm when looking for an insurance policy.
• Age Limits:Insurance providers usually have pre-determined age limits for all insurance plans. It is extremely important for you to check the entry age and the maturity age of a policy since the policy tenure is subject to the maximum maturity age.
• Premiums:Premium rates are linked to several factors such as the policy buyer’s age, policy tenure, risk cover opted for, riders purchased, etc. Ideally, when you purchase a policy, you should compare several plans to find a policy that offers the most competitive pricing.

Purchasing a life insurance policy is a significant financial decision. Make sure that you and your nominee are able to make the most of the policy by opting for the right policy type, choosing an adequate risk cover, and selecting a sufficient policy term.