A life insurance policy is the cheapest and safest mode of making a certain provision for one’s family. Everyone in the family can sleep peacefully without having to worry about the future.
A person who dies without adequate life insurance should have to come back and see the mess he created.
Will Rogers
So what is a Life Insurance policy?
Life Insurance is a contract between the policyholder and the insurance company. The policyholder pays a premium to the insurer for a certain time period or for life, and in return the insurer promises to pay the assured sum to the nominee upon the death of the policyholder. A life insurance cover is intended to ensure that, in the event of your death, folks who depend on your income are not left financially unsupported.
What are the different kinds of Life Insurance?
- Term Plan – Purest form of Life Insurance. You pay a premium for the specified number of years. Your nominee gets the benefit upon your death anytime during the term specified in the contract. Your nominee doesn’t have to pay the premiums after your death. On maturity of the plan (or expiry) and if you still alive, you don’t get any benefits.
- Whole Life – Pay the premium as long as you are alive. It has some additional savings benefit.
- Endowment Policy – Apart from covering the life of the insured, helps the policyholder save regularly over a specific period of time so that they are able to get a lump sum amount on the policy maturity in case they survive the policy term.
- Unit Linked Insurance Plans – The goal is to provide wealth creation along with life cover where the insurance company puts a portion of your investment towards life insurance and rest into a fund that is based on equity or debt or both and matches with your long-term goals.
The concept of Life Insurance is that – During your career, if something happens to you, your family should have a safe future and not struggle because of loss of the primary breadwinner. The insurance cover will replace your salary / income for the family. Ideally, your family will need the insurance cover only for the duration of your career – be it business or profession. Beyond that, your savings and investments should cater to your retirement needs. You shouldn’t rely on insurance for your retirement life. The best product for life insurance – Term Plan! Say you are 30 and you want to retire by 60, you should take a term plan for 30 years – till you retire and not for 40 years because your insurance agent says so. During the next 30 years or till you retire, split your income into 4 parts – Insurance Premium (both Life & Health, max 5%), Savings / Investments ( at least 35%), Daily Expenses (needs) and Luxury (wants). The last part should happen after the first 3 is taken care of. The insurance will provide cover to your family for the next 30 years. The savings / investments will provide for the retirement life. This is also the reason why I don’t recommend Whole Life policies where you pay a higher premium. Instead you could save that money and make better returns.
How much insurance cover do you need?
- Amount equal to your family’s regular Annual Expenses till the end of Term Plan
- Goals – Children’s Education and Marriage
- Net Assets = Assets (Savings & Investments) – Liabilities (Liabilities are Home & vehicle EMIs or any personal loan)
When should you take an insurance policy?
Fun is like Life Insurance; the older you get, the more it costs.
Kin Hubbard
If you do not fall under any of the categories mentioned earlier, the best day to buy a term plan was before your last birthday. The 2nd best day to buy one is before your next birthday. Premiums are not likely to come down in future. In fact, they have gone up post Covid.
Until what age should you get cover?
Ideally, your retirement age!
Life Insurance is a product to secure a backup regular income for your family during your working years. IT IS NOT A RETIREMENT PLAN. For retirement, you have to save and invest regularly to build a huge corpus. Like I said before, your pension, PPF, FD, Gold and equity investments should provide for your family beyond your retirement.
What should be the type of premium payment?
Pay every month or year (small discounts if you pay annually).
What additional benefits (also known as riders) should I opt for?
- Accidental Death
- Disability
- Critical Illness
- Premium waiver on Accidental disability or Terminal illness
In the first 2 options, you get a certain one-time additional amount on occurrence. In 3rd option, you get a one-time lump-sum amount as a proportion of your basic sum assured (cover), on your being diagnosed with a critical illness. 4th option allows the policyholder to stop premium payments upon disability or being diagnosed with a terminal illness.
Final thoughts
It’s better to be 5 years too early, than be 5 minutes late.
Given that life insurance premiums increase with your age, please take one before your next birthday if you don’t have one already.
Life Insurance gives you the opportunity to be the Dark Knight. It’s not for you. It’s for your family.
I will leave you with this:
An ounce of prevention is worth a pound of cure.
Founding Father of America & Insurance – Benjamin Franklin