| Personal Finance |
| Page: lifeinsurance |
Life Insurance
Life insurance provides protection against the financial loss caused by death. If the main breadwinner expires due to unforeseen circumstances, the family is left without the main income source and may get into financial distress. However, if he/she is adequately insured, the impact of the financial loss is cushioned. To choose the best insurance product, it is essential to understand the purpose it serves. It offers you a cover for different needs at different stages of your life cycle. Choose your insurance cover accordingly.
Changing Life Insurance needs
In terms of the quantum of life cover, several people advocate the Rule of thumb which states that one should insure oneself for at least six to ten times one’s present annual income. This amount is normally adequate for the family to sustain itself at the present levels, until it recovers from the financial loss caused by the absence of the main breadwinner. However, if we use this rule in isolation, we are taking into consideration only the present salary levels, which will give us an incomplete picture. We shall also consider the present savings, household expenditure, loans and liabilities while working the right amount of cover for any person.
Since life insurance is part of the complete process of financial planning, it must be reviewed on a regular basis. Insurance is best described as a life-cycle product. Just as we carry out regular service checks on our car, it is important to regularly review our life insurance and overall financial plan so that we can make the required adjustments due to a change in our life stage or lifestyle. For instance, if you find that your loan outstanding has increased, or there are more dependents, it might be necessary to increase your life insurance cover. Here is a guide to the insurance cover which might be considered adequate at various stages of your life.
|
Life Stage |
Need |
Solution |
|
Child |
Future Planning, Contingency planning |
Child plan, term plan, endowment plan, Unit Linked Insurance Plan (ULIP), money back plan |
|
Young and Working |
Cover risk, financial planning, wealth creation. |
Term, endowment, money back, ULIPs |
|
Young and Married |
Cover for dependents, liabilities, wealth creation |
Term, credit term, retirement, ULIPs, endowment |
|
Married with kids |
Cover for dependents, liabilities, wealth creation, future planning, health care |
Term, critical illness, ULIPs, retirement, return of premium |
|
Nearing retirement |
Cover for dependents, liabilities, wealth multiplication, contingency planning, health care, flexibility |
Term, medical cover, ULIPs, pension, capital multiplication |
|
Old age |
Regular income, health care |
Pension, medical cover |
Insurance and Investments
Often, life insurance products combine insurance and savings. The premium you pay is divided into mortality charges for life insurance cover and investments (after deducting expenses). The savings part of life insurance can be used meet various goals of your life like your child’s education, retirement cushioning etc.
Most experts advise that it is best to buy a pure life insurance plan like term insurance and invest separately in equity, mutual funds, fixed deposits, etc., as you deem fit. However, many of us prefer the convenience of investment products life insurance offers. There are traditional products like whole life plans, endowment plans, money back plans, etc., which offer a high safety factor but relatively lower returns. Unit Linked Investment Plans (ULIPs) function like mutual funds and the investment portion of the premium you pay is invested in a fund of your preference.
Life insurance cover has to be taken at the young age. The premium you pay is more as you grow in age. Hence, an overall view of financial planning is required at the time one begins to earn.