How to choose life insurance policy: 4 golden rules every buyer should know

Buying life insurance can be a little tricky and complicated, especially with so many products promising protection and returns. But according to financial experts, choosing the right policy becomes far simpler when you focus on the real purpose of insurance, i.e, providing financial security for your dependents.

In a conversation with Upstox, Mumbai-based tax and investment expert Balwant Jain explained essential rules everyone should know before opting for a life insurance plan.

1) Buy insurance only if you have dependents

Life insurance is not an income tax-saving tool; its main purpose is to financially protect those who rely on you.

"One should not buy life insurance until one has financial dependents. Likewise, the sole purpose of buying life insurance should never be tax saving," says Mumbai-based tax and investment expert Balwant Jain.

The real benefit lies in ensuring your family’s financial stability in case of unforeseen events.

2) Prefer term insurance plans

Not all life insurance products are created equal. Term plans are straightforward policies that cover life risk and pay a sum assured to the nominee if the policyholder dies during the policy term. If the insured survives, no money is paid. These plans are cost-effective, easy to understand, and available online or offline.

"Insurers have also introduced many variants of term plans where the payment on death of the insured is staggered over a few years instead of being paid in a lump sum," explains Balwant Jain.

3) What should be the insurance cover amount?

A common mistake is underestimating the amount of coverage needed. Life insurance should adequately replace your income and cover long-term obligations for your dependents.

This ensures that your family’s lifestyle and financial goals remain secure even in your absence.

4) Do not mix insurance and investment

"If you buy life insurance for investment, neither purpose is fulfilled adequately. As investment-insurance products charge a high premium compared with that on term plans, the resultant sum assured is far lower than what you would have got with the same premium. Since no one has unlimited resources, one should use them optimally to get the maximum life insurance needed. Secondly, due to various costs involved, the investment in an insurance product fetches you a very low return, which is generally far lower than the alternatives available in pure investment products," explains Jain.

Keeping insurance and investments separate helps you achieve both adequate protection and better returns. One should use term plans for protection and consider other instruments like mutual funds, PPF, or ETFs for long-term wealth creation. This ensures maximum coverage for your family and better returns for your savings.