What are the procedures and terms to know before buying a life insurance policy?

You may be recommended to have a life insurance policy by just about everyone around you. But what is life insurance really? It is an agreement between an insurance company and you where you pay regular premiums in return for a sum of money assured in case of your demise. This money is paid out to your family to financially support them in your absence. Hence, it’s important to have a life insurance policy in place if you are the sole or one of the breadwinners of your household.

But before you start looking at different life insurance policies, here are some basic terms you should understand.

  • Death benefit

Death benefit is the money the insurer pays out to the nominees of the policyholder in case of their demise during the policy term. The death benefit may or may not be the same as the sum assured depending on the type of life insurance policy. For instance, in the case of a term insurance life policy, the sum assured is the same as the death benefit because the policy is in place solely to insure the event of death. However, in case of life insurance plans with investment components, the death benefit may be lower or higher than the sum assured.

  • Survival or maturity benefit

Some types of life insurance policies typically come with only a death benefit, such as term insurance. However, there are other policies like endowment plans and Unit linked insurance plans (ULIPs) that also come with a survival or maturity benefit. In such a case, if the policyholder survives the policy term, then they receive all the premiums paid by them along with bonuses as the survival or maturity benefit.

  • Free look period

After you buy a life insurance policy, you get some time to review the policy terms and conditions in-depth, ask questions to the insurer, and consult your agent or lawyer, if any. If during this period you are not satisfied with the policy, you can terminate it without facing any penalties. Usually, the free look period is between 15 to 30 days depending on the insurer. The insurance company will refund the premium paid after recovering the medical exam cost, if applicable, and other relevant charges.

  • Surrender value

If you decide to terminate your life insurance policy before its maturity, you may receive a part of the premium allocated to savings and earnings. This is known as the surrender value. Not all life insurance policies come with a surrender value, hence it’s important to look at the terms of your policy before you buy it. The amount of the surrender value, if any, will also vary depending on your life insurance policy and insurer.

  • Riders

A life insurance policy may come with the option of riders for additional coverage to make your policy more comprehensive. Some of the most common and helpful riders are the critical illness rider, accidental disability rider, family income benefit rider, etc. Riders are designed with specific events in mind. For instance, the critical illness rider helps with meeting the medical costs and living expenses once the policyholder is diagnosed with a critical illness by making a lump sum pay out. The life insurance policy payout i.e., the death benefit is made later once the policyholder has passed away.

Now that you know these important terms, let’s break down the procedure you will have to follow before buying a life insurance policy:

  1. Determine the sum assured and premium

The sum assured would depend on your income, family’s financial goals and standard of living, number of dependents, other investments, etc. The amount should be at least 10 times your annual income. The exact number would depend on how long your family would need to become financially independent. That could either mean the number of years your children would take to finish their education or the time your spouse would set up alternative sources of income. You can use an online life insurance premium calculator to figure out the amount of premium you’ll need to pay for the desired sum assured.

  1. Select the right insurer

There are several factors to consider and compare when selecting an insurance company including the benefits and flexibility offered, the terms and conditions of the policy, the claim settlement ratio and turnaround time of the insurer, and accessibility and quality of customer service. Most of this information will be available online and you can always solve your doubts by directly contacting the insurer.

  1. Fill out the form

You will be required to fill in details regarding your health, income, and lifestyle habits such as smoking, etc. It’s essential that you are completely transparent when filling out these details. That’s because misrepresentation of any information, even if it is a mistake, can lead to claim rejection later.

  1. Undergo a medical test

In some situations, you may be required to undergo a medical examination. This is usually when you have a pre-existing condition such as diabetes and hypertension, are on medication currently, have a history of a certain illness, or are above the age of 35. You may also be required to take a medical examination if you’re opting for a sum assured over a certain amount and this varies depending on the insurer.

Once you’re through these procedures, you can pay your premium and have your life insurance policy in place. It’s essential to regularly review your policy and make changes to the coverage depending on changes in your finances, goals, and age.