For most Indians, a plain term insurance plan with a sum assured of 10–20× annual income (or enough to replace expenses till dependants are self-reliant), till retirement, and with essential riders (critical illness, accidental disability) is the most efficient choice. Verify claim settlement ratio, solvency, disclosures, and tax implications before buying. (Moneycontrol, ICICI Prudential Life Insurance)
Why life insurance matters
Life insurance transfers the financial risk of premature death from your family to an insurer. It ensures ongoing expenses, children’s education, and debts are covered—without forcing distress sales of assets or loans.
A 7-step checklist (at a glance)
- Define the purpose: income replacement, loan protection, legacy.
- Calculate cover: replace expenses + repay liabilities − adjust for existing assets/cover.
- Pick the product: usually term insurance; avoid mixing insurance with investments unless you have a specific need.
- Choose tenure & payout: till retirement/child independence; lump sum vs monthly income.
- Add riders wisely: critical illness, accidental death, waiver of premium.
- Select the insurer: high claim settlement ratio (CSR), strong solvency (≥150%), simple claims process. (Moneycontrol, ICICI Prudential Life Insurance)
- Confirm taxes & disclosures: understand 80C, 10(10D), and high-premium rules before you pay. (Income Tax India, The Indian Express)
Step 1: Clarify your objective
- Pure protection (most people): Replace income and repay loans if you’re not around.
- With investment: ULIPs/endowment/whole-life combine cover + savings. Costly; use only if your plan demands forced savings or specific estate objectives.
Step 2: Calculate the right cover (with simple formulas)
There are two practical methods. Use both and pick the higher result.
A) Expense-replacement method (recommended)
- Annual family expense (ex-EMIs) = ₹E
- Real return (inflation-adjusted discount rate) = r (assume 3% if unsure)
- Years to protect = n (till youngest child is financially independent / spouse retires)
- Annuity factor: AF=1−(1+r)−nrAF = \frac{1 – (1+r)^{-n}}{r}
- Core cover = ₹E × AF
- Add liabilities (home loan, education goal)
- Subtract: existing life cover + liquid assets for this purpose.
Example: Expenses ₹10 lakh, r=3%, n=25 → AF ≈ 17.41 → Core cover ≈ ₹1.74 crore. Add ₹50 lakh loan; subtract ₹20 lakh assets ⇒ Recommended ≈ ₹2.04 crore.
B) Income-multiple rule of thumb
- 10–20× annual income depending on age, debt, and dependants. Younger families with large goals lean to the higher end.
Premium guardrail: Keep total life premiums within 5–7% of annual income so your financial plan remains liquid.
Step 3: Choose the right policy type
| Policy type | What it is | Typical cover per ₹1 lakh premium | Who should consider |
| Term insurance | Pure risk cover | Highest | Primary earner seeking maximum cover at lowest cost (most buyers) |
| Term w/ Return of Premium (ROP) | Term + premiums back if you survive | Lower cover vs pure term | If you psychologically prefer “money back” and accept higher cost |
| Endowment / Guaranteed plans | Savings + life cover, fixed maturity | Low | Very conservative savers; accept lower returns for guarantees |
| ULIP | Market-linked investing + cover | Varies | Investors wanting bundled investment + insurance with discipline |
| Whole life | Cover to age 99/100 | High cost | Estate/legacy planning, HNIs with specific succession needs |
For pure protection, term is usually optimal. Investment needs are generally better served by mutual funds or dedicated products; avoid mixing unless necessary.
Step 4: Tenure, premium mode, payout options
- Tenure: Usually till retirement age (e.g., 60) or till your youngest child reaches financial independence (age 22–25).
- Payout structure:
- Lump sum for loan closure and one-time goals.
- Income option (fixed or inflation-linked monthly) to mimic salary for family budgeting.
- Ownership: Each working spouse should have separate policies based on their own income and liabilities.
Step 5: Riders that add value
- Critical Illness (CI): Lump sum on diagnosis of specified illnesses; consider stand-alone CI or rider for essential risks.
- Accidental Death Benefit (ADB): Extra sum assured for accidental death (optional).
- Permanent Disability / Waiver of Premium (WOP): Maintains cover if you can’t work—highly useful.
- Keep rider cover focused; don’t overspend on low-value add-ons.
Step 6: Choose a reliable insurer
a) Claim Settlement Ratio (CSR): Indicates % of claims paid. The industry’s individual death CSR was ~98.45% for FY 2022–23; prefer insurers with high and consistent CSR across years. (Moneycontrol)
b) Solvency Ratio: IRDAI requires minimum 150%—a capital buffer ensuring the insurer can honour future claims. Prefer buffers comfortably above the threshold. (ICICI Prudential Life Insurance)
c) Transparency & governance: IRDAI has flagged concerns around any “window-dressing” of solvency—another reason to choose well-capitalised, well-governed brands. (The Economic Times)
d) Service metrics: Look for e-KYC, tele-medicals where applicable, easy claims documentation, and track record of quick payouts.
Step 7: Tax rules you must know (succinct)
- Premium deduction (80C): Premiums for life insurance qualify within the ₹1.5 lakh 80C limit. For policies issued on/after 1 Apr 2012, deduction applies only if premium ≤ 10% of sum assured (20% for older policies). (Income Tax India)
- ULIPs (from 1 Feb 2021): Maturity is tax-free only if aggregate annual premium across ULIPs ≤ ₹2.5 lakh; CBDT clarified the aggregation rule. Otherwise, gains are taxed as capital gains; death benefits remain exempt. (The Economic Times, https://www.taxmann.com)
- Non-ULIP high-premium policies (from 1 Apr 2023): If aggregate premium across such policies > ₹5 lakh in any year, maturity proceeds are taxable under Rule 11UACA; death benefits remain exempt. (The Indian Express, EY)
Tip: If your annual premium budget for non-ULIPs could cross ₹5 lakh, split objectives between term cover (protection) and mutual funds (investments) to preserve tax efficiency.
Step 8: Disclosures, underwriting & pricing
- Be 100% truthful about health, habits (smoking), occupation, and financials. Non-disclosure is a common reason for claim issues across insurers. (HDFC Life)
- Expect medical tests at higher sums assured or older ages; smoker rates are higher.
- Buying online often lowers distribution costs; compare quotes but don’t chase the absolute cheapest if solvency/claims record is weaker.
Step 9: When and how to review
Review cover after major life events—marriage, home purchase, child birth, big loan, pay jump. If affordability allows, layer an additional term policy instead of replacing an old one (so you don’t lose favourable older pricing).
Worked Indian example (illustrative)
- Salaried professional, age 32, CTC ₹18 lakh; net family expenses ₹9 lakh; home loan ₹40 lakh; assets earmarked for dependants ₹10 lakh.
- Using expense-replacement with r=3%, n=28 → AF ≈ 19.60 → Core cover ₹9 × 19.60 = ₹1.76 cr.
- Add liabilities ₹0.40 cr; subtract assets ₹0.10 cr ⇒ ₹2.06 cr.
- Round up to ₹2–2.5 crore term plan, tenure to age 60, with WOP + CI rider. Keep total premiums within ≤7% of income.
Common mistakes to avoid
- Under-insuring by picking a sum assured equal to just loan balance.
- Buying investment-heavy plans for protection needs; you get lower cover for the same premium.
- Ignoring tenure: Don’t stop cover at 45–50 if dependants still rely on your income.
- Not nominating / updating nominee after life events.
- Skipping riders that meaningfully hedge disability/illness risks.
Quick FAQs
Q1. Term vs ULIP—what’s better?
For pure protection, term is better and cheaper. Use ULIPs only if you want a bundled, disciplined investing product and understand costs and taxation. (The Economic Times, https://www.taxmann.com)
Q2. Should I take “return of premium”?
Only if the higher premium still fits your budget and you value the psychological comfort. Financially, plain term + separate investing typically wins.
Q3. How do I compare insurers quickly?
Check: multi-year CSR, solvency ≥150%, complaint ratios, digital claims process, and pricing. (Moneycontrol, ICICI Prudential Life Insurance)
Q4. Is the maturity amount always tax-free?
No. ULIPs breaching the ₹2.5 lakh aggregate rule and non-ULIP policies (issued ≥1 Apr 2023) breaching the ₹5 lakh rule can be taxable; death benefits remain exempt. (The Economic Times, The Indian Express)
Internal links (suggested)
- ULIP vs Term Insurance
- How to Create a Personal Financial Plan
- Emergency Fund: How Much is Enough?
- Retirement Planning in Your 30s, 40s, and 50s
Sources & references
Industry CSR (FY2022–23): Moneycontrol summary of IRDAI Annual Report. (Moneycontrol)
80C deduction rules & 10% SA condition: Income Tax India—Section 80C (current text). (Income Tax India)
ULIP aggregation rule (₹2.5 lakh): CBDT circular coverage & analysis. (The Economic Times, https://www.taxmann.com)
Non-ULIP high-premium rule (₹5 lakh) & Rule 11UACA: CBDT notification coverage. (The Indian Express, EY)
Solvency ratio threshold (150%): IRDAI-mandated minimum explained. (ICICI Prudential Life Insurance)