How to choose the right Life Insurance Policy.
You need life insurance policy to secure the financial protection for your family members, especially spouse, children and other dependents, in case something will happen to you in future. Insurance companies offer many plans such as Whole Life, ULIP, Child Plans, Money Back Policies etc. However, choosing the appropriate coverage for you and its benefits for your dependents or beneficiaries is of great importance. Some people believe that buying life insurance is like planning for their death, the fact is that life insurance is not about death, it's about realizing a peace of mind prepared to face any financial crisis that would hit the family in case of your untimely demise. It provides you with a sense of security that no other form of investment provides. Life Insurance is considered one of the most popular savings/investment schemes that provides reasonable returns as well as protection and also serves as a Tax saving mechanism. Funny part of this story is that , people still believes that life insurance means LIC.
The concept of life insurance is not properly understood and also provisions are very complicated. While every Insurance Policy provides you with the life cover you can either choose between a policy that results in long-term savings such as Endowment or Whole Life policies or a term-life policy that is much more affordable which provides only life cover . By doing some careful planning, research, shopping around and spending time to understand the various Life Insurance options you can take care of your family's future needs at an affordable price.
Life insurance needs for each individual vary depending on their personal situation. If you have no dependents, you probably don't need life insurance. If you don't contribute a significant percentage of your family's income, you may not need life insurance. Now a day's taking life insurance policies have become a passion rather than the actual requirement mostly among the youngsters. This is the result of overcrowding of advertisements in the visual/ print Medias and mushrooming of insurance agents. At the root of the problem is the advice given to the investor by the insurance agent. In most of the cases, the client's choice is largely determined by the agent's incentives rather than the advantage of the product.
If your salary/regular income is important to supporting your family, re-payment of loan or other recurring bills, or sending your children to college, life insurance is important to ensure that these financial obligations are covered in the event of your death.
It's difficult to apply a rule-of-thumb because the amount of life insurance you need depends on factors such as your other sources of income, how many dependents you have, your debts, and your lifestyle. The general guideline is between seven and ten times your annual salary. In other words an estimate of how much money you want to leave for your family and also an estimate of how much money you can afford to pay on a monthly basis.
Estimate the amount you want to leave behind taking into consideration: your current age, number of family members who will need financial support, if married whether your spouse currently works, and educational needs if you have any children. Also factor in other routine support needs like rent, living expenses, etc (also consider increases in cost of living). Use a spreadsheet or find insurance estimation calculators on the internet that might help you to develop this. Be sure to include your spouse or other family members in this planning effort.
Search for Life Insurance Policy Options contacting insurance agents or browsing websites of Insurance companies like LIC, ICICI,HDFC, Bharati, Tata, Reliance, etc. Develop an understanding of the various types of policies and their terms and benefits.
The following are the major types of insurancepolicies
a) Term Insurance - Term life insurance is called "term" because it provides coverage for a specific period or term, it is that Policy which provides life coverage only. On the death of the insured it pays the face amount of the policy to the named beneficiary within the Term. However, once the term is over and if the policy is not renewed, the coverage ceases & if death occurs after that, you don't receive any Cash benefits. It is the most straightforward type of Life Insurance, It is also called Pure Insurance since the policy has no financial investment value & most of your premium goes to pay for coverage.
b) Children Insurance Plans : The Children Plans are designed to secure your child's future by giving your child (the beneficiary) a guaranteed lump sum, on maturity or in case of your unfortunate demise, early in the policy term. There are two types of Children's Policy, under the first Plan; the child himself is insured although the premium is paid by the parents. In the second Plan, it is the parent who is insured but in case of his untimely death, or at time of the maturity of the policy, the child gets the benefit.
c) Annuities and Pension: There is an increased need for Retirement Plan due to Increase in Life Expectancy & Increase in the Cost of Living (Medical Expenditure). In an annuity, the insurer agrees to pay the insured a stipulated sum of money periodically. The main purpose of an annuity is to protect against risk as well as provide money in the form of pension at regular intervals.
d) There are two kinds of Pension policies:- The Immediate Annuity and The Deferred Annuity. In the former, you have to invest a lump sum and start receiving pensions immediately. In the latter, you start building a corpus at a young age & on retirement; you receive annuities out of this corpus.
e) Whole Life Policy : It is probably the simplest policy to understand. Every year you pay a fixed premium based on your age and other such factors. And then, as the years go by, you earn a certain interest on your policy's cash value. The policy continues into your old age for the same premium you started out with. This policy provides protection that is permanent and also accumulates handsome returns. Whole Life Policy is an insurance cover against death, irrespective of when it happens. This policy, however, fails to address the additional needs of the insured during the post-retirement years. It doesn't consider a person's increasing financial needs either. While the insured buys the policy at a young age, his/her needs typically increase over time. By the time he/she dies, the value of the sum assured might be too low to meet his/her family's needs. As a result of these drawbacks, insurance firms now offer either a modified Whole Life Policy or combine in with another type of policy.
f) Endowment policy : Endowment policy is the most popular policy in the world of life insurance as it is the combination of risk cover with financial savings. An Endowment Life Insurance policy provides more of an investment. One can earn more capital for specific purposes and is also protected against the insured's premature death. If the insured dies during the tenure of the policy, the insurance firm has to pay the sum assured just as any other pure risk cover. Endowment Life insurance is mostly used by many for anticipated financial needs, like children's education or ones' retirement. Premium for an Endowment Life policy is much higher compared to a Whole Life policy. The cost of such a policy is higher but worth its value.
g) Money Back policy : This is more of an Endowment policy as part of the amount assured is paid at fixed periods, before the maturity date, in the form of survival benefits. These policies are structured to provide sums required as anticipated expenses over a stipulated period of time. The premium is payable for a particular period of time. If the insured survives till the expiry of maturity date of the policy, the survival benefits are deducted from the maturity value.
h) Unit plans (ULIP)- wherein insurance companies invests in stocks ,with caution, on your behalf, at least possible risk to your money. This types polices are very risky.
When choosing life insurance, use the Internet's resources to educate yourself about life insurance basics, find an agent you trust, then have the policies he or she recommends evaluated by an independent financial adviser. Also consider the reputation of the Insurance Company, life insurance is a long term business, please ensure that, you are dealing with an insurance company having stability to protect your investment for a long term and capable of taking care of the financial needs of your family in your absence.
Internationally known financial advisors strongly believes that if you want insurance, buy term; if you want an investment, buy an investment, not insurance. Don't mix the two. For the record, unless you're a very savvy investor and understand all the implications of the various types of life insurance policies. The bottom line is that the average person should be purchasing term life insurance
Best RegardsPrakash Nair B.Com, LLB, CAIIB, CA(inter), DMFM, NCFM (Mutual Funds, Depository, Derivatives), CME-1
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