2016-05-10 12:39:00 UTC
Life insurance should not be very complicated; rather it should give you and your family financial peace of mind and assurance that your loved ones will be taken care of and protected from unexpected events.
If you are not born rich and have dependents that live on your income, you definitely need life insurance to provide your dependents financial security.
However, there are exceptions to the rule:
Retired People who have grown up children and have paid off their loans.
People who are young and single; either dependent on parents or only responsible for themselves.
People who already have the finances to support dependents after they are gone.
It can seem counter-intuitive, but it is when you’ve begun to start a family, and are in the nascent stages of your working career, that life insurance is key, as you are not likely to have much by way of savings, certainly not enough to provide for your family’s requirements.
This is a topic for a separate post by itself but briefly, the following should be borne in mind.
Term insurance is certainly the most popular and economical life cover , perhaps the only one most people will ever need ( read our blog on term insurance here) , but a host of other types of insurance products such as endowment policies , whole life insurance, Money-back plan, ULIPS, etc , many of which combine risk cover with a savings component are available . These are called Cash value plans, as the plan accrues cash value as you pay the premiums.
Because whole life policies are guaranteed to pay out at some point in the future, they cost an order of magnitude more than term life policies. Moreover, the cash value policies carry many hidden costs(commissions, renewal charges, etc.) and it is never easy for a layperson to figure out how much he is paying for insurance versus investment. However, if you have surplus funds but no knack for investment, insurance plans with a cash value component may be a better option.
This is never an easy question to answer, as the exact amount will depend on individual circumstances such as number of dependents, number of earners in the family, the age of your children and their educational needs and expenses, etc. In addition, you have to factor the loans you have to repay and the investments you already have.
Once you have established the financial support your family would need after you are gone, you should ensure your life cover is at least 10 to 15 times your current annual income. However, this is not a hard and fast rule.
Your term life policies should typically last until your retirement age. Bear in mind, too, that if you change jobs, your new employer may not offer the same level of cover, so you may prefer to arrange your own life policy so that you have continuous protection in place.
Term life policies are easily the cheapest and most recommended for individuals with modest earnings . Term life insurance is for a specific period so if your financial situation improves significantly and you no longer feel the need for a cover, you can stop paying premiums. Whole life policies or investment-linked policies on the other hand cost significantly more, but provide cash returns and in some cases pension as well.
All life insurers use the following factors to calculate your premiums:
If you have dependents and have loans to repay, you should seriously consider buying a life insurance policy. Moreover, coverage costs are much lower when you are young, especially if you are healthy and have family history of ill health.
Bear in mind that the older you are when you buy insurance, the more costly premiums will be, so don’t postpone buying, else premiums may possibly become too expensive for your required cover.
It is a good idea to revisit your insurance needs periodically, because the circumstances can change at any time. For instance, you may have bought an insurance policy when you got married, but when you have children and a housing loan to repay, it’s worth considering additional cover. Similarly, if you have moved up the corporate ladder and have invested in a new apartment, you may need to revisit the amount of cover you need.
It is not a good idea to buy insurance products just to get tax breaks (under section 80 CC), as this does not make sense and there are other investment products like Equity Linked Saving Schemes, or Public Provident Fund, which provide the same income tax benefits.
Many employers cover their employees under a group life policy, which will pay out a lump sum if you die in service. However, it is worth checking if this cover is adequate and if necessary supplement it with further cover of your own. It is also worth noting that if you leave your job, your employer group policy will not cover you.
Honesty is the best policy when you buy insurance. Do not try to conceal information in order to reduce the cost of your premiums. Insurance companies will definitely investigate before paying out any large claim and if your insurer discovers after your death that you lied, they will not pay out and your family will suffer due to your indiscretion.
We encourage you to shop online as you can narrow options and compare quotes without dealing with sales personnel trying to push a particular policy onto you. Even if you do need assistance for something in particular, chat and telephone call options are generally available. You can get as many quotes as you like, and avoid overzealous agents who want to sell the plans which earn them maximum commission. Online, what you see on the screen is what you get.
Not all Insurance companies are equal and so policy buyers have to exercise caution. Your insurance policy is supposed to safeguard your family in the worst-case scenario, therefore the company you buy insurance from should be financially healthy and reliable. Please read our post on claim settlement ratio for more information and guidance on this aspect.