Life Insurance: Yes or No?

Life Insurance: Yes or No?
Of course life insurance is a difficult topic! Anything that deals with mortality can be uncomfortable. Add to that, there is an information overload – different kinds of policies, overzealous agents and irrelevant advice! Let’s break it down, let’s make life insurance buying decisions a little easy. First of all, do you REALLY need it? Yes, but only if you have a family or a dependent!

With that answered, let’s make sense of the flooded life insurance market in India. While it may seem like a lot, there are just two kinds of insurance covers – one that provides pure protection and the other kind which combines life cover with an investment component. If your first thought is why choose only protection when you can get some return too, you are not alone. In India, insurance is mostly regarded as an investment tool unlike in advanced economies where insurance is sought for protection.

So, what should you buy?

  • Low premiums + Pure protection: Most financial advisors swear by pure protection or Term Life Covers. Typically low premium plans, the policyholder pays a sum year on year, for a fixed period. The nominee gets the sum assured if the policyholder dies during this tenure. This is life insurance at its simplest and purest form. Note: If the policyholder outlives the period there are no maturity benefits.
  • Higher Premiums + Return: Endowment/ Money-back, Whole-life, Non-linked plans, Unit Linked Insurance Plans (ULIPS) are life covers with an investment component. These plans are typically higher in premiums when compared with Term plans.   Policyholder not only gets life cover but also on outliving the tenure gets the total sum and a return.

How much Insurance do you need?

Most financial advisors say that the thumb rule is 10-12 times of your annual income. Another view holds that the sum insured should be investment enough to be an income replacement in your absence.

5 tips to keep in mind:

  1. Buy a policy that covers you the longest. Most term policies come with fixed tenures – 10, 25, 30 years etc. A 31 year old may not be eligible for a 30 year plan and will have to settle for a 25 year plan. This ends at the age of 56 when insurance needs are higher, but so are premiums and chances of getting rejected.
  2. Choose policies that cover your big loans.
  3. Policies bought online cost lesser because insurance companies don’t have to spend on intermediaries.
  4. Choose a policy that allows you to increase the sum assured according to your life stage.
  5. Since policies are bought for longer tenures, buy from insurance companies that are likely to exist in the future.

Adequate life insurance is a major part of financial wellness. Buy life insurance policies that are in line with your needs and resources.

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