How insurance can be useful?
Insurance can prove advantageous in meeting several financial goals of the individual and his family. Here are some of the important ones:
Financial cover against loss of life, which makes sure your family can support itself in your absence
Buying a house
Pension or regular income post-retirement
Post-retirement income for NRIs
These are just some of financial goals you can achieve with the help of life insurance. More importantly, life insurance plans are flexible. This means although you won't find an insurance plan dedicated to buying a house, you can buy an endowment plan (traditional or market-linked) with the aim of paying for a house at a future date.
Types of Life Insurance
Broadly, there are five basic types of life insurance plans:
Term insuranceTerm plans are the most basic form of life insurance. They provide life cover with no savings / profits component. They are the most affordable form of life insurance as premiums are cheaper compared to other life insurance plans.
Endowment plansEndowment plans differ from term plans in one important aspect i.e. maturity benefit. Unlike term plans which pay out the sum assured, along with profits, only in case of an eventuality over the policy term, endowment plans pay out the sum assured under both scenarios death and survival.
Unit linked insurance plans (ULIP)ULIPs are a variant of the traditional endowment plan.They pay out the sum assured (or the investment portfolio if it's higher) on death/maturity. Since ULIPs invest in stock markets they are well-suited for individuals with appetite for risk.
Whole life policyA whole life insurance plan covers a policyholder over his life. The main feature of a whole life policy is that the validity of the policy is not defined so the individual enjoys the life cover throughout his life.
Money back policyThis is a variant of the endowment plan. A money back policy gives periodic payments over the policy term. To that end, a portion of the sum assured is paid out at regular intervals. If the policy holder survives the term, he gets the balance sum assured.
How much life insurance do I need?
Although, it is not possible to attach a rupee value to human life, it is nonetheless important for you to estimate the value of your life in terms of what it will take for your family members to be financially independent in your absence. In insurance parlance this is the sum assured and the financial estimate of the value of your life is called Human Life Value or HLV.
Calculating the HLV involves two steps:
The fundamental method of calculating the human life value involves two steps:
Add up all expenses like household expenses, lifestyle expenses among others
Calculate future liabilities (like outstanding loans) that your family members will have to pay off in the event of your death.
Once you add the two figures, you get your human life value, which in effect is the sum assured for your life insurance policy.
Points to remember:
There is no one-size fits all life insurance plan. Your life insurance plan does not have to be like your friend's or colleague's or relative's insurance plan. Your needs and goals are different and this must reflect in your insurance plan.
The earlier you start the better it is, since life insurance premiums are lower at an earlier age and begin to rise as you age
Go for term plans - they are the most affordable form of life insurance which means you get a larger life cover at a lower premium
Use life insurance riders effectively to enhance the effectiveness of your life insurance policy. A rider is an add-on to the primary policy, which offers benefits over and above the policy subject to certain conditions.
Feel free to talk to an experienced and competent agent about the policy details and whether it is suited to you.
How do I choose the right Life insurance for me?
Once you have identified the need to take life insurance, you should know about getting some basic steps right to select the best life insurance policy.
Select the best life insurance plan/policy in 3 easy steps
- Engage an insurance advisor
While this may seem trivial, engaging a reliable and competent insurance advisor at the initial stage in your quest for life insurance is critical. Most individuals are not capacitated to take a decision by themselves and need the expertise of an insurance advisor.
- Calculate the life cover
The insurance advisor will help you calculate the amount of life cover - or the sum assured. He will assess sources of your income, number of your dependents, your debts and liabilities and your expenses based on your lifestyle and arrive at a life cover. He will also decide the best plan be it - term plan, endowment plan, unit-link plan or a combination of plans, to help provide you with an optimum life cover. You can also check your Life insurance need with a calculator online, which is a quick and easy way to find out.
Likewise, if you have other needs like planning for your child's education or marriage, pension for your retirement or a woman's insurance plan for women, trust your advisor to do the math and come up with an ideal solution.
- Compare insurance plans
Since there are many insurance companies in the market offering a variety of plans, you need to be sure you select the most suitable one. The insurance advisor will do the homework by comparing life insurance plansÂ from various insurers across relevant parameters recommending the most apt plan based on your needs.
What are the Benefits of Buying Life Insurance?
Life insurance offers three major benefits, namely protection, long-term savings, and investment. Here is an insight into each of these advantages.
Life is unpredictable and full of uncertainties. The risk of an untoward incident such as death cannot be eliminated. In such a situation, your family will have to face financial constraints caused by the loss of your regular income. Investing in a life insurance plan provides the safety net during such times. Your insurance provider is liable to pay the beneficiary or nominee the pre-determined death benefit, thus keeping your family protected even in your absence.
It is important to consider life insurance if you are seeking to make long-term savings. Such a product helps you to save systematically and build a corpus for your future. The accumulated amount may be used for multiple purposes, such as purchasing a new home, funding your child's future education or meeting his marriage expenses, among many others. What's more, life insurance plans also offer regular pay-outs in the form of annuities, and is therefore, an excellent method to meet your retirement goals.
Unit-Linked Investment Plans (ULIPs) offered by life insurance providers are primarily investment instruments. This market-linked product acts as a tool to create wealth. ULIPs offer significant returns on the premiums paid towards the insurance policy. Most life insurance plans provide considerable returns during maturity, thus making it an attractive investment vehicle.
Besides the major aforementioned advantages, life insurance plans offer a host of other benefits. You may claim tax deductions under Section 10, 80C, and 80CCC of the Income Tax Act, 1961 on the premium paid towards your insurance policy. You may also borrow a loan against your insurance plan in case of a financial crunch.
Buying life insurance plan is a necessity. While many invest in such a plan, not all are aware of the numerous benefits it offers. Life insurance plans help your family tide over difficult times and provide them with financial support in your absence. Besides, availing of an insurance policy inculcates the habit of disciplined savings, thereby enabling you to build a good corpus. You may, therefore, opt to invest in a life insurance plan and fulfill your obligations in the best possible way.
Why should i buy Life insurance online?
Buying Life insurance online is fast, efficient and cost effective. Companies have assessed the needs to their clients over the years and have now made insurance available online. Below are some of the advantages of buying insurance online:
1.) Direct Buying- Customers deal with distributors when buying insurance online. Buying offline, they save the commission that would be paid to the distributor and hence it is cost effective. You eliminate the need of a third party and hence end up saving time and money.
2.) Informed deal-Whenever you decide to buy a plan, you always have an option to compare the plans in terms of benefits offered, coverage, features, claim process, renewal etc. This way one can easily weigh the pros and cons and finally can choose the right insurance plan that meets his/her needs.
3.) Access to online reviews- Customers always leave an online review about their experience with the company. You can have access to these reviews and ensure you have all the details about the product and the company before making a decision.
4.) Automated services- The online platform isn't restricted to sale only, instead, it is a fast and competent servicing channel at the same time. The policyholder can avail the online services like download the policy document or brochure, get prompt insurance quotes online, when the policy lapses, renew it online, pay the annual premium online, track your investments, make claim whenever required etc. You can do this independently and swiftly.
5.) Customer Support- You get access to 24x7 customer support when you buy insurance online. The company has a chat option on their website where you can ask the staff anything. You can get clarity to doubts, or look for the policy options and pretty much have access to any information online.
In conclusion, it makes sense to explore the option of buying insurance online, so that you save time and money and have easy access to more options. It is not cumbersome as offline process, is easier and quicker. All your paper work is also saved in the account online hence eliminating the need for print outs etc.
Frequently Asked Questions (FAQ)
Is life insurance necessary?
Life insurance is basically an arrangement where you agree to pay premiums in return for a lump sum that takes care of any financial requirements you or your dependents may encounter, either after your death or your policy's maturity.
The lump sum taking care of future financial goals is a benefit. Benefits accruing on death of the insured are death benefits, those on survival of the policyholder are called maturity benefits.
Life insurance helps meet financial goals that are either foreseeable or urgent, especially in case of death of a benefactor or parent.
Most people perceive life insurance as a back up to tide over a crisis that may leave dependents in a financial lurch, which is a limited view.
Taken in a broader sense, life insurance via maturity benefit can be used to foot the expenses such as your child's graduation expenses, servicing a home loan, purchasing a car, to name a few.
Whether or not you need life insurance will depend on you or the dependents financial goals or requirements, the money required for fulfillment of these requirements and other factors.
What is an ideal life insurance cover?
There is no one glove fits all solution when it comes to how much life insurance each person needs. However, the generally acceptable strategy to assess your insurance cover is to get 10 to 18 times your annual income; depending on what age you subscribe to an insurance policy.
The amount of insurance cover you need depends on how many people are exposed to a financial risk which may arise due to death or some kind of contingency. The cover should be such that the dependents should be able to at least survive in your absence to a satisfactory level until such time they are self-reliant.
It is a good idea to make a financial requirement analysis based on not your current needs but also projection of your future needs. Since financial goals differ from person to person and so do spending patterns, it is important to take these and also your assets and liabilities when making such an assessment.
Another way to determine how much insurance you need is to use the Human Life Value method. This says that an estimate of how much insurance you need changes according to what your economic value or net worth is. This varies with every individual as not only current net worth but future ones too are taken into account. You should calculate your HLV, to go ahead about this method
How much will life insurance cost me?
The purpose of life insurance is mainly two fold - first to provide financial protection to enable your dependents eke out a reasonable living in the event of your death, and the second to help you meet your financial needs and goals in the future should you survive till the maturity of the policy.
Whether you consider the death or maturity benefit of life insurance, how much life insurance you need will depend on your age at entry, how many dependents you have, the type of financial goals you have for the long term, inflation and other determinants.
Life insurance should not be judged in terms of return on value of investment but as a shock absorber that would help your family absorb the impact should a financially dire situation ensue in case of your death. It thus helps your family rely on an alternative source of funds left by you. It also enables you meet your financial goals by considerably reducing your out of pocket damages.
Some key factors affecting the cost of life insurance are age and inflation. As you age, premiums become costlier and are also affected by the rate of inflation and other factors. This is the reason you should start young when subscribing to an insurance policy. Just to put this in clearer perspective, a 30 year old person opting for a cover would need to pay considerably less premium, than a 40 year old who was opting for the same.
At what age should I buy life insurance?
A vital aspect to note is that it is better to buy life insurance when you are relatively younger and healthier. As you age, the statistical probability of you dying increases and so do your premiums. Starting with low priced contributions helps you to be adequately covered or protected even at a later stage in life with minimal costs. It can also help meet many of your financial goals should you survive the term of the policy.
The optimal age range to buy life insurance in India is between25 to 40 years of age. If you can start earlier, it would be even better, but on an average, people don't have income to pay for their premium since they are not working before they turn 25. The earlier you start on the 25 to 40 age spectrum, the better and more cost efficient buying life insurance turns out to be.
While individuals up to the age of 40 should choose a life insurance cover roughly 15 to 20 times their income, those between 40 and 50 should go for protection amounting to 10 to 15 times their annual income while those above 50 should aim for security five times their annual income.
Starting younger also helps you leverage the power of compounding since you are paying premiums for a considerably longer length of time.
- Types of Insurance Policies
- How to buy Term Insurance Plans Online
- Compare Critical Illness Insurance