How to choose the best life insurance policy

Though we all hope for a stable future, we hardly can predict what lies in the future. Buying a life insurance is an important financial decision to make specially if you have dependants who might face financial hardship in your absence or due to any event that severely affects your income generation capability.

In this case, a life insurance can be a great protection tool to provide financial support. Given that there are many companies that offer life insurance policies, it is important to think about five key factors before buying a policy.

Expectation from your policy

Primary objective of life insurance is to provide protection against death, disability, sickness and/or accident of the insured person. The secondary objective is to provide savings to meet any future financial obligations.

However, the reality in Bangladesh is that most people mainly consider life insurance as a savings tool and give less or no focus on the protection element. Also, people tend to compare investment return of a life insurance product with a savings product offered by other financial institutions.

This is not a fair comparison as insurance companies need to make less risky investment that may not guarantee highest return in the market. If savings is your only focus then life insurance is not a good choice for you.

Finally, do not forget that your life insurance needs will be changing throughout the years due to changes in major life events. It is cheaper to buy a policy when you are young and relatively healthy. The longer you wait, the greater the chance of something happening to you before getting an insurance coverage.

Amount of coverage

How much financial protection you need for future would vary based on your personal and financial conditions. You need to consider all the financial obligations like day-to-day expenses of dependants, outstanding debts and any other expenses that you can foresee.

Also consider the value of your liquid assets (cash in hand, savings etc.). As a rule of thumb, your financial obligations minus the value of liquid assets should be your desired life insurance coverage.

Now estimate whether you can afford desired life coverage with your current disposable income. The annual premium for life insurance should not exceed 10 percent to 15 percent of your total annual income.

Do not worry too much if it looks difficult to calculate because before buying you can easily reach out to an insurance planner (agent) who can assess your financial needs and serve you as a trusted adviser.

Type of product

The best suitable life insurance would depend on various factors, including affordability, current life stage, coverage period, coverage amount and types of benefits.

Basically, you need to think about the objectives you want to achieve through life insurance. For example, if you are at early forties and have a kid then you can go for a 10 to 20-year-long endowment policy that would give life coverage and maturity benefits.

You can also add living benefits like critical illness coverage. The maturity amount can be utilised for kid’s education, marriage or further investment. The critical illness coverage can protect you against major disease e.g. cancer, stroke, heart attack.

One important thing you should realise is that the insurance premium you would pay will be divided into 2 parts – protection and savings. So, the premium for providing protection will be treated as a consumable benefit and will not accumulate for maturity benefit. Once again, an insurance planner can help you to explain and suggest the best suitable product for you.

Surrender feature

Surrender means discontinuation or full cancelation of a life insurance policy. People usually surrender when the coverage is no longer required or face financial difficulty to continue the policy.

Usually if a policy has savings component then you can expect surrender value as per the specified schedule shared during policy issuance. In the first one to two years your policy may not have any surrender value and in the following years surrender value can be lower than the total premium paid.

This is usually the case everywhere in the world as premium is the primary source of income for the company from which company needs to pay commissions, other acquisition and marketing costs, salary for employees, claims etc.

After covering those expenses, company cannot come up with an attractive surrender value in the initial years. In fact, associated costs for the company in the early durations may be higher than the premium received so far. So, surrendering the policy may not be a good idea and most likely it will not make you satisfied in terms of the receivable amount.

Company’s reputation

Life insurance company sells a promise to protect your loved ones when you are not there. Hence, it is very important to ensure that a company has satisfactory reputation to keep the promises of meeting the financial obligations made to you. There are few things you can check.

For example, company’s financial strength to meet future obligations (claims, maturity), number of years in operation and image in the market, customer services and corporate governance. You can also discuss with friends and family who have considerable insights to guide you. 

The writer is a certified actuary from the Society of Actuaries, USA and currently working as a senior manager at MetLife Bangladesh. He can be reached at actuaryfahim@gmail.com.