Insurance is a highly misunderstood product, and it’s often bought and sold for the wrong reasons. At the same time, it’s a very important part of your life, and you must know certain ground rules for making the right decisions in the new year. Many of us consider insurance just another investment for tax savings. Our day-to-day lives are full of unpredictable risks, for example, loss of life, loss of income, critical illness, disability, etc. Insurance planning means figuring out adequate cover against “insurable risks” and getting the most out of the premium you pay. Tax exemption is just another aspect of it. Having the right insurance cover gives you peace of mind as it provides financial support in case of contingencies.
Insurance Is For The Earning Member Of The Family
Life insurance is a replacement for your income. When your income ceases or falls insufficient either due to death, illness, retirement, or a major goal such as a child’s education or marriage, insurance fills in the gap. On your death, the money received from term insurance policies will provide a corpus with which the family can pay off debts, convert dreams into reality, and still lead a comfortable life. You must have seen cases of non-working mothers or non-earning family members getting insured. It goes against the fundamental principle of insurance. Therefore, it’s important that the breadwinner covers the risks to his life and income so that his family’s quality of life is not compromised after he is gone.Your life insurance needs:
Calculating life insurance needs is not a simple exercise; you must evaluate your current and required coverage in 2010 and take corrective action. Remember that each of us has our own lifestyle, goals, aspirations, and dependents, which may be completely different from the life situation of your friend or colleague. So what works for someone else may not work for you. There are essentially three ways to calculate your insurance needs.
Expense Protection- calculates the corpus required to take care of the family’s future expenses and goals. Inflation diminishes the value of money, and hence expenses need to be adjusted to inflation for the calculation of protection required.
- Human Life Value
- Needs Analysis
For what term do you need this cover?
Ideally, insurance must be taken to cover the working period of one’s life. You take insurance to protect your dependents from the loss of your income; using the same logic, you take insurance for the time that the dependents are being supported by your income. Hence, it is advisable to take insurance until one’s retirement. However, when insurance is taken for protecting and saving towards specific goals, then the tenure of the plan should match the years left for meeting the goal.What type of products suit you?
Choosing a product will depend on the specific need and the life stage one is in. What is the final product you will choose? When there are multiple choices that match the need, it is affordability that makes the final choice. Most importantly, individuals must be aware of the purpose of the insurance they are buying. They must know that life insurance products for investment and savings are structured for the long term and meant for someone who is earning and whose earnings are supporting his or her dependents.Financial planning and its role in selecting insurance
To be able to prescribe the best insurance products for an individual or family, a financial plan is necessary. Any advisor needs in-depth knowledge and understanding and proper prioritization of all aspects of your life. The probable duration of life, amount of security needed, present and future needs and shortfalls, and post-retirement requirements are also essential pieces of information to be collected. Knowledge of the “markets,” mutual funds, and economic climate, coupled with comprehension and application of HLV (human life value), expense protection, and corpus requirements for retirement, helps in prescribing an effective solution. With the awareness of the need for proper financial planning on the rise, coupled with the plethora of insurance products available, it is imperative that you take any decision after doing your home work or engaging a competent financial planner.
In A Nutshell
The insurance requirement changes with every change in your life: income, expenses, lifestyle, members, liabilities, and assets.
It is very important that you are adequately covered, as inadequate cover is equal to no cover at all.
Insurance planning is the first step towards financial planning, and financial planning should be the first step towards purchasing insurance. To advise an individual on his or her insurance needs, it is important to get a holistic view of the present and the future.
Insurance requirements must be reviewed every two years or when there is a change in the family scenario, for example, the addition of dependents.