Life risk cover i.e. financial protection to the family in case of an unforeseen event- say death, illness, disability on account of accident, etc –is the main purpose of taking an insurance policy. In order to meet various socio-economic needs of different people, it is suggested that every individual should plan their insurance products based on the human life value of the life assured.
What are the important factors in choosing the right life insurance policy is based upon different needs of the different people. Though insurance is seen as a ‘compulsory savings’ leading to creation of wealth which can be utilized for education/marriage of children; for old age provision; for construction of house; etc. but policies are also taken to get exemption from Income Tax and to assign these to financial institutions as collateral security while availing different type of credit facilities including housing loan.
Therefore while choosing the right life insurance policy; following factors need to be given a thought:
Do You Need Life Insurance?
Nothing could be more devastating to a family than to lose the bread winner prematurely. While the emotional impact is huge, the impact on finances can be equally overwhelming. A way of understanding the magnitude of the risks involved is to consider how much you earn a year and multiply it by the number of years to your retirement. Ignoring insurance means that you have made a decision to live with the risk.
The alternatives to properly insuring your life may be either inadequate or impractical. Saving to provide an emergency nest egg may not accumulate enough funds in time. Relying on Social Security will provide at best a basic survival income. Life insurance may be the only efficient way of creating the ready funds to replace your ‘life value’.
Check Your Financial Position
In the initial phases of earning life, people are careless about making provision for the life ahead. They want to enjoy and have fun with all the money they have. Those who are born with silver spoon in their mouth may not think about financial planning but not all are so blessed. Another key factor in deciding the life insurance policy is to check your own financial status whether you family can sustain the loss of income in case of sudden stoppage of regular income.
Check Your Assets and Liabilities
Your current assets and liabilities would help you assess how much insurance you would need. One should keep in mind that there should always be a balancing factor for the assets you are creating by availing mortgage etc or by raising other liabilities. If it is not binding upon you to pay for the assets you have like house, car etc, then no insurance cover is necessary but if you have raised loans then it is necessary to have your Net Worth checked. More liabilities than your assets means indicate that you should go for a right life insurance policy.
How Much Life Insurance Do You Need?
The most important factor that comes into mind is the question that how much life insurance do I need. This can be decided by calculating your current income. The first general rule about how much life insurance you need to buy is to take your income, multiply it by 10 and that will then determine how much you should buy.
Another way you can determine how much you need to buy is dependent upon the style of living the family has become used to. Life insurance, is not just a lump of cash, it represents food on the table, a comfortable home, a school of choice for your kids, a reliable car – everything that makes up your lifestyle. For that amount of insurance to decide, you should know how much you want your wife to have as an annual income in case something happened to you. Then take that number and divide it at least by 5% thinking that if she invested the money she could earn at least 5% and that should get her that number.
How Long of a Term Do You Need?
Individual insurance needs change with every stage in life. However, the known fact is that the earlier one buys a life cover, the cheaper it works out for him. So buying life insurance even if you are currently a young professional is a wise option. Typically, you’re going to see 10-year, 20-year, and 30-year policies. Depending on your situation, your age, how long you plan on living for, how much debt you have will determine how long of a term you should go for.
Who will be the Beneficiary of Your Insurance Amount?
The money received in lieu of your life should not become financial windfall for those who do not deserve it. You should think before taking a life insurance policy whether someone is going to suffer in case of loss of your life like wife, kids or old dependent parents etc. as funds are required to pay out large debts such as a mortgage, and the balance invested to provide an ongoing income for the family. But if none of these are going to be the beneficiaries, think twice before opting for an insurance policy.
Which is the Right life Insurance Policy?
Currently most of the insurance companies are providing different insurance plans according to the diverse needs of the public. Mainly, you can choose a Term Plan, Whole Life Plan, Endowment Plan, ULIP and Pension Plan as per your needs and financial conditions
Finally, it is good to review your income changes and needs periodically and checking regularly the insurance arrangement , to ensure that you’re getting the most out of your life insurance policy.