Life Insurance| Monica’s Archives

Life insurance is an essential part of financial planning. The main purpose of purchasing a life insurance policy is to ensure that the dependents are financially protected in the event of the death of the life insured. It is important for the person to be sure that the coverage he purchases fits his needs.

Deciding the coverage amount

There are two theories for deciding the coverage amount – human life value concept and need-based approach.

Human Life Value

The human life value concept uses four factors to determine how much life insurance will be needed by an individual to protect his family and assets. These factors are:

1)      Annual income

2)      Annual expenses

3)      Years left until retirement

4)      Expected value of the current rupee at the end of this period due to inflation.

Need-Based Approach

It focuses on the financial needs of surviving family members rather than the expected earnings of the insured. The family’s needs are divided into two main categories:

1)      Immediate needs at death (cash needs)

2)      Ongoing family needs (net income needs)

So, the needs-based approach says:

Immediate needs at death + The present value of ongoing family needs – Expected available assets = Life insurance to meet family needs.

Types of Life Insurance Policies

The choice of policy should be based on your needs and affordability.

·         Term Life Insurance – this is in effect for a specific period of time. If the insured dies within that timeframe, the beneficiary of the policy receive the death payment. If the insured survives that period of time, the beneficiary receives nothing and the policy is closed.

·         Whole Life Insurance – This remains in full force and effect for the life of the insured, with premium payments being made for the same period. Some whole life policies have limited premium payment options where the policyholder can pay for a shorter period such as 10-15 years or until age 65. Under this option, premiums are higher since the payments are made during a shorter period of time.

·         Endowment Insurance – These plans generally guarantee a particular sum of money either on the death of the insured or on the maturity of the policy whichever is earlier. The premium for such plans is higher than term insurance as they provide cash values.

·         Unit Linked Insurance Plans (Ulips) – In this, the asset allocation decision rests in the hands of the policyholder himself. He decides how he wants to distribute his money across the broad asset classes (equity, debt, balanced, liquid) and how and when he wants to re-allocate.

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Riders

Riders are provisions which the policyholder may agree to insert in his basic policy, giving him extra sum assurance or expanding the scope of the policy benefits, which otherwise are not available under the general provision of the policy. Riders come with payment of an enhanced premium.

The common benefit riders available are:

·         Critical Illness Rider

·         Accident and Disability Benefit Rider

·         Income Benefit Rider

·         Waiver of Premium Rider

·         Major Surgical Assistance Benefit Rider, etc.

Buying a Life Insurance Policy

There are hundreds of schemes being offered by various life insurance companies operating in India. Each policy differs from each other on certain parameters. However, you can use the following checklist to decide which policy best suits your needs:

·         Till what age will the policy cover your life risk?

·         What are the premium amount and the premium paying term?

·         Is there any premium waiver benefit available?

·         Which riders can be attached and what is the additional premium?

·         What are the upfront and regular cost?

·         Are the returns guaranteed or based on actual performance?

·         If a unit-linked policy, verify the past performance of the scheme.

Hope the above information would be useful to decide about the life insurance you would like to take.

                                                                      Thank You!