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5 Key Factors to Consider Before Purchasing Life Insurance

Ensure your life insurance policy meets your financial goals by learning these five key factors to avoid common mistakes. 

Written by : Knowledge Centre Team

2025-10-15

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12 minutes read

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Research in the buying behaviour of Indian consumers for life insurance suggests that a large number of people primarily invest in life insurance to save tax under the old regime. Even those who do invest in insurance for financial safety end up ignoring the very first rule of safety and end up with inadequate life cover.

If you want your life insurance policy to work for your financial protection goal, you need to steer clear of these mistakes. Getting the right life insurance starts with asking the right questions, about how much cover you actually need, what your family will require, and what a policy truly offers beyond its headline benefits. Let’s understand this in detail.

Key Takeaways

  • Your life cover should be at least 10-15x your annual income, adjusted for loans, dependents’ needs, and inflation.

  • Look beyond the sum assured; your family may need a monthly income payout, not just a lump sum.

  • Always check an insurer's claim settlement ratio; the industry average stood at 97.82% in FY 2024-25.

  • Riders like critical illness cover and waiver of premium can significantly strengthen your base policy.

  • Policy exclusions are as important as inclusions; always read the fine print before you sign.

5 Essential Considerations Before You Choose Life Insurance in India

Consider the following five factors to build a clear understanding of what you want from your life insurance policy:

  • Your Life Cover Need: If you wish to provide your family and children adequate financial protection, you need to know how much they will need. The answer starts with the present household expenses and goes on to include the following:

    1. Future financial goals of the family.
    2. Present household needs, including monthly living expenses, children’s school fees,.
    3. Future household needs, such as home renovation, major repairs, and modifications.
    4. Financial needs of the family, which include health insurance coverage, life insurance for the spouse.
    5. Future lifestyle and household expenses.

      Your life insurance needs are a combination of all these demands. Thus, you should have a life cover that is large enough to provide for your family’s needs as per today’s estimates and keep up as your needs grow.

      This means you should have the option to increase your life cover easily. The best life insurance plans available today give you the option to increase your life cover either at crucial life stages or automatically at a fixed rate. It ensures your coverage grows in step with your responsibilities.

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  • Your Family’s Income Needs in Your Absence: Estimating the size of the life cover is only the first step. You still need four more to go before you are equipped with all the information you need to buy the perfect life cover.

    Once you have estimated the size of your ideal life insurance, your next step is to estimate your family’s income needs in your absence. A regular monthly income makes it easier to manage the household. As long as you are around, you can ensure that the household runs smoothly.

    However, in your absence, the family will need an alternative source of income. If your life insurance only offers a lump-sum payout, your family members will have to reinvest the proceeds to generate a safe monthly income.

    Many of the best term insurance plans offer a monthly income as a death benefit payout option. This means your family doesn’t have to worry about generating a regular income, provided:

    1. You have decided on the income amount and the growth rate for the income.
    2. You have divided the total sum assured in the plan towards a combination of income and lump-sum payout.

      Remember, a regular income payout is for the convenience of your family. But the lump-sum payout also needs to be there, so that your family can invest in their long-term goals and meet any immediate liabilities.
  • Insurer’s Claim Settlement Record: Almost everyone looks at the claim settlement ratio of life insurers to judge the likelihood of claim settlement. However, it’s not just the claim settlement ratio that makes a difference today.

    Claim settlement experience is the moment of truth for your life insurance plan. Losing the breadwinner is devastating enough for a family, and if they have to struggle to receive the financial support they are entitled to, it almost defeats the purpose of life insurance.

    That is why the best insurers have ‘claim guarantee conditions’ in place for life insurance policies. A claim guarantee ensures that if your policy meets the conditions, the claim is settled faster. When evaluating insurers, look for those with a high claim settlement ratio, ideally above 95%, and a committed turnaround time for eligible claims.
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Did You Know?

For FY 2024-25, the industry-level individual death claim settlement ratio stood at 97.82%.


Source: OutlookMoney

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Always verify the latest claim settlement data on the IRDAI website or the insurer's annual report before making a decision.

  • Additional Features of the Life Insurance Plan: Additional features help you build a stronger financial protection umbrella, which can protect your family from multiple risks. A few of these additional features include:

    1. Accidental disability cover: Provides financial assistance in case of physical disabilities resulting from an accident.
    2. Critical Illness Cover: Provides financial assistance in case you contract a life-threatening disease and need treatment for it.
    3. Waiver of Premium Option: Physical disabilities can hinder your ability to earn money, but your family still needs the financial protection of the life cover. This option allows you to continue the life cover after suffering a permanent disability without paying any additional premiums.
    4. Child Support Benefit: This is an optional benefit you can add to your base life cover to ensure additional financial support for your children.

      Apart from these, options like a limited premium payment term and return of the premium can also be useful for you.
  • Policy Exclusions: Eventually, one of the most neglected sections of any policy is the exclusions. Knowing what your life or term insurance plan covers is only one side of the coin. To set your expectations right, you also need to look at what is not covered in a life insurance plan.

    For example, most life insurance does not cover death during adventure sports activities, including bungee jumping, skydiving, and dirt racing. Similarly, deaths due to war, terrorist attacks, rioting, and even death while driving under the influence of alcohol or narcotics are also outside the scope of coverage.

    It is also important to note that suicide within the first year of the policy is a standard exclusion under most term plans, as per IRDAI guidelines.

Common Life Insurance Mistakes to Avoid in India

Understanding what to look for in a life insurance policy is only half the battle; knowing what pitfalls to avoid is equally important.

  • Buying insufficient cover: Choosing a low sum assured to save on premiums often leaves the family financially vulnerable in a crisis.

  • Treating insurance as a tax-saving tool: Buying a policy purely for tax benefits under the old tax regime, rather than for protection, almost always results in inadequate coverage.

  • Ignoring policy exclusions: Not reading the fine print can lead to claim rejections at the worst possible time.

  • Delaying the purchase: Waiting too long to buy life insurance means paying higher premiums and risking rejection due to health conditions.

  • Naming a minor as the sole nominee: Without appointing an appointee alongside a minor nominee, the claim payout can get stuck in legal complications.

  • Letting a policy lapse: Missing premium payments and allowing the policy to lapse can leave your family entirely unprotected.

Conclusion

Thus, buying a policy not only safeguards your family’s future but also does so conveniently.  It is not just about paying a premium but also about ensuring that the people who depend on you are protected, no matter what.  With these five factors in place, you can make a more informed decision and achieve this goal. Take the time to assess your needs carefully, compare your options, and choose a plan that truly works for your financial goals.

Glossary

  1. Sum Assured: The fixed amount your insurer pays to your nominee upon your death or policy maturity
  2. Claim Settlement Ratio: The percentage of claims settled by an insurer out of total claims received in a financial year
  3. Policy Lapse: Occurs when premiums are unpaid beyond the grace period, causing the policy to lose coverage and benefits
  4. Waiver of Premium: A rider that keeps your policy active without further premium payments if you suffer a permanent disability
  5. Policy Exclusion: A specific condition or event for which your life insurance policy will not pay a claim
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Uncertain About Insurance?

FAQs

The earlier, the better. Buying life insurance in your 20s means lower premiums, no pre-existing health conditions to complicate underwriting, and a longer coverage period for your family's protection.

No. While a high CSR, ideally above 95%, is important, you should also consider the insurer's claim turnaround time, guarantee conditions, customer service record, and financial solvency rating before deciding.

Yes, you can hold multiple life insurance policies. However, you must disclose all existing policies to the new insurer at the time of purchase to ensure smooth claim settlement for your nominee.

If premiums are not paid within the grace period, the policy lapses and your family loses coverage. Some policies acquire a paid-up value after a certain period, but benefits are significantly reduced.

Generally, death benefits received by the nominee are tax-free under Schedule II (Table S.No. 2) of the Income Tax Act 2025 (previously referred to as Section 10(10D) of the Income Tax Act 1961). However, certain high-value policies issued after April 2023 may be subject to taxation on maturity proceeds.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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