The core purpose of life insurance is simple: if you die unexpectedly, the people who depend on your income should be able to maintain their lives and meet their goals. How well a policy does that job depends largely on two things — the type of plan and the amount of cover.
Term insurance: protection only
A term plan pays a death benefit to your nominee if you die during the policy term. If you survive the term, nothing is paid back in a standard term plan. Because the insurer is only covering the risk of death, premiums are comparatively low for a given amount of cover. This is why term plans are usually the most efficient way to buy a large cover amount.
Variants exist — return-of-premium plans, increasing cover, cover for critical illness through riders — each with a higher premium. They can be useful, but compare what the extra premium buys.
Other life insurance plans: protection plus savings
- Endowment plans pay a benefit on death during the term or on survival to maturity.
- Money-back plans pay out portions of the benefit at intervals during the term.
- Unit-linked insurance plans (ULIPs) invest part of the premium in market-linked funds, with returns that depend on fund performance.
- Whole life plans provide cover for a very long period, often up to age 99 or 100.
These plans combine insurance with saving or investing. The trade-off is that, for the same premium, the life cover is usually much smaller than a term plan would provide. Some families choose them for the discipline of forced saving; others prefer to buy term cover and invest separately. Both are legitimate choices, as long as the protection need is met first.
How much cover is enough?
You may hear rules of thumb based on a multiple of annual income. They are a starting point, but a needs-based estimate is more reliable. Add up what your family would need, then subtract what is already available:
- Income replacement: the household expenses your income currently supports, for the number of years your dependants would need support — adjusted for inflation.
- Outstanding liabilities: home loan, car loan, personal loans and credit card dues.
- Future goals: children's education, a child's marriage, a spouse's retirement corpus.
- Less existing resources: current savings and investments that could be used, and any existing life cover.
The difference is your cover gap. Revisit it at major life events — marriage, the birth of a child, a new home loan or a significant change in income.
Choosing the policy term
Cover should usually last until your dependants are financially independent and your major liabilities are repaid — often until your planned retirement age. Cover far beyond that adds cost without addressing a real need.
Details that matter at claim time
- Full disclosure: answer every question on health, habits such as smoking, occupation and existing policies honestly. Non-disclosure is a frequent reason for disputes.
- Nominee details: keep them updated, and make sure your family knows the policy exists and where the documents are.
- Insurer's service record: look at the insurer's claim settlement history and the ease of its claim process, alongside the premium.
- Riders: understand exactly what each rider covers and excludes before adding it.
The right plan is the one that leaves your family financially secure if the unexpected happens, at a premium you can comfortably sustain for the full term.