How to buy life insurance on a budget?

When you shop around in the insurance market, you may find that based on your age, occupation, health and other factors, you may be eligible for a certain amount of maximum coverage. The interesting thing is, more often than not, you may not need the highest amount of coverage you are eligible for.

For example, you may be eligible for cover worth Rs. 5 crore, but the exact amount of coverage you need may be just around Rs. 1 crore. The good news is that you need not buy the higher cover, which also comes with steeper life insurance premiums.

But then, how do you actually go about buying life insurance on a budget, without overspending? Here are 5 tips to help you budget for life insurance smartly.

The life insurance market is no longer home to just one or two kinds of insurance products. Today, there are several categories of life insurance products, each with its own sub-categories as well. So, just like you would when you go shopping for clothes or for food, it is always a good idea to take a step back and figure out what your options are.

To give you a better idea of the plethora of life insurance plans available today, let's take a quick look at the common kinds of policies.

Term life insurance:
Term life insurance is the affordable kind of life cover, and it easily fits into any budget. This budget life insurance typically offers a sizable coverage at very pocket-friendly premiums!

The cover offered by term plans lasts for a specific period or term. In case of the policyholder's demise during this term, the insurer pays out the sum assured under the plan to the nominee.

Savings plans:
Also known as endowment plans, savings plans are life insurance plans that give you insurance coverage and also help you save up in a disciplined manner over the policy term. At the end of the policy term, you will receive the maturity benefits.

Unit Linked Insurance Plans (ULIPs):
ULIPs help you enjoy the dual advantage of insurance and investment. You can invest in a variety of ULIP funds like debt funds, equity funds, money market funds and even hybrid funds. Plus, over the policy term, you can also switch your funds based on how your goals change and how the market moves.

Child plans:
Child plans are life insurance plans that can help you save up for the big goals in your child's life, like their education or their wedding. You can choose a timeframe that aligns with your child's college-going age or marriageable age, so the payouts from your life insurance plan coincide with the relevant life stages.

Retirement plans:
Lastly, retirement plans - another category of life insurance - help you plan for the retirement phase of life. The payouts from these plans can be a lump sum amount, periodic payments, or a combination of the two. This way, you can rely on these financial benefits in the absence of a primary source of income. These are the common categories of life insurance plans you can choose from. The more benefits a life insurance plan offers, the higher the insurance premium is going to be. And in addition to the base plan, you can also choose from a variety of different insurance riders, which come with an additional premium.

So, take a look at all your options, and decide on the kind of life insurance plan you want to buy. That way, you will not be using your insurance budget on a plan you don't need.

Next to the kind of plan you need, the amount of life insurance you require is the important factor to consider if you want to get a life cover within the right budget. If you buy a larger cover than you need, you are going to be paying a higher insurance premium too.

Your cover should be large enough to accommodate the following needs –

• Your family's everyday expenses for the foreseeable future
• The cost of your children's education and wedding
• Your existing debts and liabilities
• Your post-retirement needs

These values may vary from one person to another. So, if you are unsure about where to start, a good rule of thumb to follow is to take your current annual income as the benchmark. Then, start with a cover that is around 5 to 10 times that number.

So, for instance, if you earn Rs. 10 lakhs annually, you may consider getting a life insurance plan with a sum assured ranging from Rs. 50 lakhs to Rs. 1 crore. This number will, of course, change based on your specific goals, liabilities and needs. But using this technique gives you a point to begin at.

Alternatively, you can simply make use of a Human Life Value (HLV) calculator to check the amount of coverage you need.

It is also important to figure out how much you can afford to pay for a life cover at this stage in your life. If you buy a life insurance plan that is way out of your budget, you will have a tough time keeping up with the premiums.

If you miss a premium payment, your insurance cover will lapse after the grace period, and you will lose all the benefits offered by the plan. So, your best bet is to first figure out how much you can afford to pay each month or each year for your insurance cover.

To arrive at this number, deduct all your current non-discretionary expenses from your current income. The amount that remains is your disposable budget for the month. The cost of your life insurance plan should be able to comfortably fit into this budget.

Here's an example to drive home this point better. Let's take up some hypothetical numbers.

Particulars	Amount
Monthly salary	Rs. 50,000
Rent	Rs. 15,000
Grocery and provisions	Rs. 10,000
Fuel and other utilities	Rs. 10,000
Remaining amount	Rs. 15,000

So, you need to ensure that your life insurance premium is well below Rs. 15,000 per month. That way, you have some funds left over to invest in other schemes for your future life goals too.

Based on the kind of life insurance plan you want, the amount of coverage required, and the budget you have, you can then find the plan that fits your needs best. Shop around a little and check the following aspects before buying a life cover.

The life insurance premium rates
Check the different premium rates offered by different insurance providers and shortlist the ones that give you budget life insurance options. This way, you can ensure that you don't overspend.

The insurer's Claim Settlement Ratio
The Claim Settlement Ratio is the percentage of claims received that the insurer has settled during a financial year. The higher this ratio is, the better, because it indicates that the insurer settles of the claims they receive promptly.

What customers have to say
The reviews of existing customers can give you some great insights into how good the insurance provider's customer service and ancillary facilities are. You can also find out if the application process is easy, if the helpline is functional and other such details.

Lastly, to ensure that you don't have to pay exorbitant insurance premiums, make it a point to get your life insurance plan when you are young and healthy. The cost is typically on the lower side at this stage because of the low mortality risk in young, healthy people.

On the other hand, if you want to purchase a life cover when you are older, the cost of life insurance also becomes higher. Furthermore, if you have any poor lifestyle habits like smoking or drinking, you need to wean off those practices because they could increase the premium charged for a life cover.

Using the pointers outlined above, you can ensure that you get life insurance on a budget. Make sure that you do not tip over to the other side and remain underinsured, though. It is important to have the right amount of coverage - neither too much, nor too little.

Also Read:

Impact of Age on Life Insurance Premiums