Understand life insurance

Every human being has plans for his and his family’s future. All of them requires sufficient amount to fulfil them. These dreams will be shattered if proper financial planning has not been done on time. This requires planned investment in appropriate financial products like life insurance, mutual funds, fixed deposits, fixed income securities, saving schemes, and many more, depending upon individual’s financial requirements.

Among these, insurance plans help you protect your family from uncertainties in life due to financial losses in terms of loss of income that may dawn upon them in case of your untimely demise. Securing the future of one’s family is one of the most important goals of life. Life insurance plans play a vital role in ensuring your family’s financial independence in the event of your unfortunate demise or critical illness. They are all the more important if you are the only bread earner in your family. No matter how much you have saved or invested over the years; sudden eventualities, such as death, always tend to affect your family financially, apart from a huge emotional loss.

Generally people tend to buy insurance plans only for tax purposes. Life insurance must find a place in an individual’s portfolio irrespective of the tax sops. The primary purpose of insurance is to ensure that your family will receive financial support in your absence. This becomes more important if person is the only bread earner in the family. Hence, the decision to buy insurance should be solely based on the individual’s need for protection; the tax benefits must be treated as incidental.

Without doubt, insurance products would rank among the most aggressively sold ones during the tax-planning season. And therein lies the root of the problem. Insurance products continue to be largely sold and bought for the tax benefits they offer. The ‘insurance’ aspect is often overlooked. For the uninformed, contributions towards life insurance premium are eligible for deduction from gross total income under Section 80C of the Income Tax Act. Thus it should be purchased after analyzing one’s financial needs. This should be purchased beforehand in order to avoid last minute wrong decisions.

Buying life insurance is buying peace of mind

Life insurance can offer peace of mind, ensuring that financial needs of your loved ones will be taken care of, in an uncertain event like a sad demise. There are individuals who tend to ignore buying insurance all together. Instead, they count on things like investments or the presence of friends and relatives to provide for their dependants, if an eventuality occurs. Such an approach is fraught with risks. In terrible circumstances, help from all quarters is always welcome; however, relying solely on the same is not prudent. Hence, having a sound life insurance policy in place is a must. Investments and a support system (family) can always play a vital, but secondary role.

Beware of mis-selling

If you are convinced about the importance of insurance and decide to buy the same, you will have another obstacle to face in the form of mis-selling. Mis-selling is a rampant practice in the insurance segment. Over the years, several insurance advisors have been guilty of selling products that were right for them (helped them earn higher commission income), rather than the investor. Also, concealing relevant facts about the product, leading to misinformed decisions isn’t entirely uncommon. Unit linked insurance plans (ULIPs) would easily qualify as both the most popular and mis-sold products. Hence, being associated with a competent and ethical advisor is vital. Also, you should acquaint your with adequate information before zeroing on any product.

How to buy insurance

The process of buying insurance can be divided into two steps. First, decide how much insurance is required and second, decide the type of insurance product that can help meet your requirement.

How much insurance, you as an individual require can be determined using the concept of Human Life Value (HLV). It refers to the monetary value of all the ‘yet-to-be fulfilled’ needs of the dependents plus all the outstanding liabilities.

The next step will be to zero in on the right insurance plan that will help you meet the objective. Broadly speaking, three popular variants of life insurance policies are available i.e. term plans, endowment plans and ULIPs.

Types of life insurance policies

Term plans are very straightforward i.e. they only provide an insurance cover. In other words, if the policy holder survives the policy term (i.e. the period for which the policy offers him insurance cover), then he gets nothing i.e. there is no maturity benefit. Term plans have the lowest premium structure.

Endowment plans differ from term plans in one critical aspect i.e. the maturity benefit. Unlike term plans, these plans provide maturity benefits under both scenarios – death or survival. Since endowment plans provide maturity benefits in both the scenarios, their premium tends to be higher than the premium on term plans.

ULIPs are innovative products combining both insurance and investments. They are market-linked i.e. they invest in equity/debt markets. ULIPs also offer maturity benefits under both scenarios – death or survival. Typically, they have the highest premium structure.

Finally, buying insurance is a continuous activity. Every individual’s needs change over a period of time. This in turn necessitates a review of the insurance portfolio. Over a period of time, most individuals would need to purchase additional insurance to ensure that they are adequately covered. The insurance advisor can play an important role in reviewing the portfolio and recommending which policies should find place therein. Hence it makes sense to be associated with an advisor for whom insurance is the core activity.

Conclusion

If you are wondering whether you should buy insurance now or later then understand that it is not readily available. Life insurance companies consider many factors like age, state of health, current income and future earning capacity while providing cover to one’s life as they are assuming financial risk and that too at very low charges. The amount can be saved or arranged for making premium payment but health can neither be arranged nor borrowed. Thus, it’s better to buy insurance cover at the earliest without delaying for any lazy reasons as death will certainly happen, but the timing is uncertain. So don’t leave your family unprotected in the sudden event of your death – after all, they are your most important assets.

 

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