Life Insurance

Life insurance is a very important tool for financial planning. It is a part of risk planning. In this case, we transfer the risk to the insurer. With this, we ensure that the goals of our loved ones are met during our absence. Some of the common questions that any individual has on insurance are answered below including how much cover to take, till what age, what kind of policy, should I go in for riders, which insurance company etc…

1. Whether you need life insurance

In case there are no dependents, you don’t require a life insurance. However, we are generally in the scenario where :

1. Someone depends on us financially for their goals including sustenance, retirement, education, higher education etc…
2. Your current assets may not be sufficient to achieve all of your dependent’s goals and if the risk may occur, this insurance could help
3. You may wish to cover your funeral expenses and also there could be some liabilities that you may have (for e.g. home loan) and this life insurance could cover these liabilities as well

2. Coverage Amount

The amount of coverage that you require for life insurance depends on your goals, your current assets and liabilities. For example, assume that you are a family of 3. For any such family, there would be few goals including child/ren education, higher education, marriage, retirement etc… The family would have taken a home loan for their new house and therefore they have an outstanding liability. They have close to Rs 10 lakhs in their bank and do not possess any other assets. In such a case, the coverage amount would be the present value of their goals + outstanding liabilites - assets. In case they wish to leave an inheritance for their children, you can add the amount to the life insurance. There are other simpler methods available including rule of thumb etc…, but in case of financial goals the amount is more accurate.

3. Decide on your financial goals for your life insurance

As mentioned in point 2, it is important to know your financial goals and therefore what would be the amount that you would require to meet your financial goals as of today. It is important to prioritize your financial goals , put an approximate amount towards such goals and add up. Buying a car , perhaps, may not fall under your financial goal for life insurance. In other words, you may not want to use the money coming from life insurance, to purchase a car but rather spend it in ways which you deem essential.

4. Type of policy

I always recommend to have Term Insurance as your life insurance policy. It is plain and simple. The premium is your expense. Premium of Term Insurance policies, when purchased early in your life, is very less as compared to other type of policies.

5. Policy term

Policy term basically means the term during which your policy is in effect.

The policy term should be the time period by when you wish to achieve your last financial goal. For example, when you purchased the policy at 34, you had 5 financial goals and by 60 if you have achieved them all and you have your retirement assets which will cover you till your life expectancy, you don’t need a life insurance. This goes back to point 1, do you need life insurance when there are no dependents ! Most likely, you may not require. This requires foresight and therefore adding an extra 2-5 years may not make a big dent in your wallet !

6. Premiums

Premiums are lowest in term insurance policy. All other type of policies focusses on inefficient ways of investing your money and therefore the premiums are high.

7. Riders

There are many types of riders which are available with the policy at an extra cost. Some of the common riders include accidental death benefit, critical illness, waiver of premium etc… One needs to check if they really could benefit from this, and decide accordingly. Some of these riders are available at very low premiums and an individual could benefit from it.

8. Insurance Company

Insurance company’s ability to stay afloat (financial stability), customer service and their brand play an important role in choosing the insurance company. Claim settlement ratio is one of the most important factors that determine which insurance company to go for.

9. Health and Lifestyle

Your own health and lifestyle also determines the amount of coverage that you should go for and the type of policy you should procure. Our behaviours and our values determine our health condition and our lifestyle. Therefore put this into perspective before you purchase a term insurance.

10. Tell your beneficiaries

It is extremely important that you inform your beneficiaries about your insurance as they need to produce these documents to the insurance company, if at all, the event takes place. This makes it easier for them.

Conclusion

Life insurance forms an important part of financial planning and it covers the risk of non-availability of financial resources in your absence. With proper financial planning, you would be able to arrive at a much better number of the coverage amount that you would need and therefore your premium that you would need will be sufficient and the policy term would be just right for you.

In case you have challenges in buying the right life insurance, you can reach out to me via email or send a message in LinkedIn

I need some help with Life Insurance!