Selecting a quality life insurance policy can be the difference between sleepless nights worrying about your family’s financial future and sweet dreams. A good policy shields your family from unforeseen challenges and guarantees a stable source of income to meet their financial needs even after you are gone. Besides the financial security, it also helps you earn interest on the amount you sacrifice today to pay for your policy. There are several vital aspects that one should inspect while buying a life insurance policy.
A life insurance policy is expected to act as an income source for your family after it matures. So, it’s obvious that while choosing the policy you should consider the amount that your family may need for your child’s education, to pay off debts and to meet other expenses a few years down the line. To factor in the depreciation of money and the inflation over the years, you will need to find the present valuation for that amount to match it against the returns from your policy. You would also need to determine how much you are willing to pay to buy the policy.
Generally, life insurance policies are long term securities and hence, you should properly research the company from which you buy your policy. Showing a high net asset value is not the only criterion by which an insurance company should be judged. The insurance investment starts paying the returns after the policy matures. Hence, it’s very important that the company has a high financial stability rating.
The company can use your funds to earn returns by two options. It can either invest into a debt fund that has low market risk or it can go the equity way and promise a higher rate of return. The interest on the debt funds is lesser because it’s the cheapest source of capital and the risk of losing the capital is minimal. Hence, the returns are guaranteed.
The equity market has a higher risk and to compensate for the greater risk a risk premium is added to the rate of interest making the returns higher than the debt funds. The companies have a mix of debt and equity and incline towards one or the other depending on their risk appetite and investor expectations. An ambitious company usually has a 60 percent equity compared to a conservative insurance company that has a 80:20 ratio of debt and equity.
Another aspect of the policy that you must check is the administrative charges you have to pay for your policy. The administrative and management fees become important because it is taken out from the returns you earn. So, a high administrative cost would mean that your net return will be significantly lower than the actual return that your policy promises. You may actually earn more returns on a conservative policy with lower management charges than a high performance policy with fat administrative expense.
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